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Suppressed Negative Information and Future Underperformance

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  • Anna Scherbina

Abstract

I present evidence of inefficient information processing in equity markets by documenting that negative information withheld by securities analysts is incorporated in stock prices with a significant delay. I estimate the extent of the withheld negative information based on the proportion of analysts who stop revising their annual earnings forecasts. This measure predicts negative earnings surprises and negative price reaction around earnings announcements. It could also be used to generate profitable trading strategies. I show that institutions tend to sell their stock holdings as my measure of unreported negative news increases, thus ameliorating the mispricing. Copyright 2008, Oxford University Press.

Suggested Citation

  • Anna Scherbina, 2008. "Suppressed Negative Information and Future Underperformance," Review of Finance, European Finance Association, vol. 12(3), pages 533-565.
  • Handle: RePEc:oup:revfin:v:12:y:2008:i:3:p:533-565
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    File URL: http://hdl.handle.net/10.1093/rof/rfm028
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    Cited by:

    1. Edoardo Gaffeo, 2013. "Using information markets in grantmaking. An assessment of the issues involved and an application to Italian banking foundations," DEM Discussion Papers 2013/08, Department of Economics and Management.
    2. repec:eee:jfinec:v:124:y:2017:i:2:p:331-348 is not listed on IDEAS
    3. Anna Scherbina, 2013. "Asset Price Bubbles; A Selective Survey," IMF Working Papers 13/45, International Monetary Fund.
    4. Marco Navone & Fernando Zapatero, 2014. "Why Do Financial Analysts Strive to Be Irrelevant? Career Concerns and Endogenous Coverage Termination," BAFFI CAREFIN Working Papers 1507, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Bryan Kelly & Alexander Ljungqvist, 2012. "Testing Asymmetric-Information Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1366-1413.
    6. Leippold, Markus & Lohre, Harald, 2014. "The dispersion effect in international stock returns," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 331-342.
    7. Berkman, Henk & Dimitrov, Valentin & Jain, Prem C. & Koch, Paul D. & Tice, Sheri, 2009. "Sell on the news: Differences of opinion, short-sales constraints, and returns around earnings announcements," Journal of Financial Economics, Elsevier, vol. 92(3), pages 376-399, June.

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