Investor Reaction to Corporate Event Announcements: Under-Reaction or Over-Reaction?
51 Pages Posted: 15 Dec 2000
There are 2 versions of this paper
Investor Reaction to Corporate Event Announcements: Under-Reaction or Over-Reaction?
Investor Reaction to Corporate Event Announcements: Under-Reaction or Over-Reaction?
Date Written: May 2002
Abstract
Two conflicting behavioral models, under-reaction and over-reaction, have been proposed as explanations for the long-run abnormal return patterns following a variety of corporate events. We test hypotheses that distinguish between these two behavioral models for four corporate events, seasoned equity offerings, share repurchases, stock-financed acquisitions and cash-financed acquisitions. The evidence is consistent with the hypothesis that long-run abnormal returns are attributable to the investor under-reaction model. Investors under-react to short-term information available prior to the event and subsequently under-react to information conveyed by the corporate event. Long-run abnormal returns reflect the net effect of investor under-reaction to these two pieces of information. We find no evidence to support the over-reaction model. We also find no evidence to support a more complicated behavioral model that postulates investor under-reaction to short-term information and over-reaction to long-term trends.
Note: Previous title: It's All Under-Reaction
Keywords: Anomalies, over-reaction, under-reaction, behavioral finance, long-horizon stock performance
JEL Classification: G14, G34
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Nicholas Barberis, Andrei Shleifer, ...
-
A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets
By Harrison G. Hong and Jeremy C. Stein
-
By Louis K.c. Chan, Narasimhan Jegadeesh, ...
-
Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies
By Harrison G. Hong, Terence Lim, ...
-
Profitability of Momentum Strategies: An Evaluation of Alternative Explanations
-
Profitability of Momentum Strategies: an Evaluation of Alternative Explanations
-
When are Contrarian Profits Due to Stock Market Overreaction?
By Andrew W. Lo and A. Craig Mackinlay