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An Empirical Evaluation of Behavioral Models Based on Decompositions of Stock Prices

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  • Bong-Soo Lee

    (College of Business, Florida State University)

Abstract

Several behavioral models have been proposed to explain the observed short-horizon continuation and long-horizon reversals in returns. We employ a time-series framework of identifying tangible and intangible information based on two valuation models: the conventional dividend discount model and the residual income model. We find investors overreact to intangible information but underreact initially to tangible information, with no significant reversal associated with tangible information in the long run. Our finding is compatible with models incorporating investors' overconfidence in their private information. We also find that the residual income model provides a better valuation than the dividend discount model.

Suggested Citation

  • Bong-Soo Lee, 2006. "An Empirical Evaluation of Behavioral Models Based on Decompositions of Stock Prices," The Journal of Business, University of Chicago Press, vol. 79(1), pages 393-428, January.
    • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:393-428
    DOI: 10.1086/497415
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    Cited by:

    1. Chuang, Wen-I & Lee, Bong-Soo, 2006. "An empirical evaluation of the overconfidence hypothesis," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2489-2515, September.
    2. Tswei, Keshin, 2013. "Is transaction price more value relevant compared to accounting information? An investigation of a time-series approach," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1062-1078.
    3. Tratkowski Grzegorz, 2020. "Identification of nonlinear determinants of stock indices derived by Random Forest algorithm," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 56(3), pages 209-217, September.

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