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Anomalous Price Behavior Following Earnings Surprises: Does Representativeness Cause Overreaction?

  • Kaestner, Michael
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    Behavioral Finance aims to explain empirical anomalies by introducing investor psychology as a determinant of asset pricing. This study provides strong evidence that anomalous stock price behavior following earnings announcements is due to a representativeness bias. It investigates current and past earnings surprises and subsequent market reaction for listed US companies over the period 1983-1999. The results suggest that investors overreact to past earnings surprises. As, on average, extreme past surprises are not confirmed by actual earnings figures, they are followed by stock market reactions of the opposite sign. Moreover, the longer the similar earnings surprise series, the higher the subsequent reversal.

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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=703661
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    Paper provided by Montpellier University, Center for Research in Finance in its series Working Paper Series with number 2005-1.

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    Date of creation: 21 Apr 2005
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    Handle: RePEc:grf:mtpwps:mk002
    Contact details of provider: Postal: Bâtiment 19, Place Eugène Bataillon, 34095 Montpellier Cedex 5
    Web page: http://www.cregofi.univ-montp2.fr/
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