Psychological Barriers, Expectational Errors, and Underreaction to News
Justin Birru
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Justin Birru: OH State University
Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics
Abstract:
This paper provides evidence that the 52-week high serves as a psychological barrier, inducing expectational errors and underreaction to news. Two clear predictions emerge and are confirmed in the data. First, nearness to a 52-week high induces expectational errors; evidence from earnings surprises and analyst price targets indicate that investor and analyst expectations are biased in a downward direction for stocks near a 52-week high and biased in an upward direction for stocks trading far from a 52-week high. Second, nearness to a 52-week high induces underreaction to news. Among positive earnings surprise stocks, post-announcement drift exists only for those stocks near a 52-week high. The evidence suggests that in contrast to currently offered preference-based explanations, a belief-based explanation may better explain the previously documented 52-week high anomalies.
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-ger
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Citations: View citations in EconPapers (21)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2014-03
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