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Unifying Underreaction Anomalies

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  • Andrew Jackson

    (London Business School)

Abstract

This paper asks whether momentum and postevent drift are manifestations of the same underlying mechanism or are separate phenomena. We find that both effects can be attributed to persistence in returns following news that affects expected earnings or earnings growth. Holding these quantities fixed, there is no momentum effect, nor is there postevent drift for our sample of events, which includes seasoned equity offerings, repurchases, equity-financed mergers, and dividend initiations and omissions. The implication is that return continuation follows fundamental news in general, and in aggregate, this explains momentum.

Suggested Citation

  • Andrew Jackson, 2006. "Unifying Underreaction Anomalies," The Journal of Business, University of Chicago Press, vol. 79(1), pages 75-114, January.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:75-114
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    File URL: http://dx.doi.org/10.1086/497406
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    Cited by:

    1. Perotti, Pietro & Rindi, Barbara, 2010. "Market makers as information providers: The natural experiment of STAR," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 895-917, December.
    2. Nitish Ranjan Sinha, 2016. "Underreaction to News in the US Stock Market," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(02), pages 1-46, June.
    3. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    4. Raj Aggarwal & Brian M. Lucey & Fergal A. O'Connor, 2014. "Rationality in Precious Metals Forward Markets: Evidence of Behavioural Deviations in the Gold Markets," The Institute for International Integration Studies Discussion Paper Series iiisdp462, IIIS.
    5. Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, vol. 82(1), pages 103-133, October.
    6. Bing Han & Dong Hong & Mitch Warachka, 2009. "Forecast Accuracy Uncertainty and Momentum," Management Science, INFORMS, vol. 55(6), pages 1035-1046, June.
    7. Stefano Gubellini, 2014. "Conditioning information and cross-sectional anomalies," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 529-569, October.
    8. Chen, Hong-Yi & Chen, Sheng-Syan & Hsin, Chin-Wen & Lee, Cheng-Few, 2014. "Does revenue momentum drive or ride earnings or price momentum?," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 166-185.
    9. Anagnostopoulou, Seraina C. & Levis, Mario, 2008. "R&D and performance persistence: Evidence from the United Kingdom," The International Journal of Accounting, Elsevier, vol. 43(3), pages 293-320, September.

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