A Tough Act to Follow: Contrast Effects In Financial Markets

Samuel M. Hartzmark and Kelly Shue

No 23883, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday’s earnings surprise was bad and less impressive if yesterday’s surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by a key alternative explanation involving information transmission from previous earnings announcements.

JEL-codes: D03 D9 D91 G12 G14 G4 (search for similar items in EconPapers)
Date: 2017-09
Note: AP CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as SAMUEL M. HARTZMARK & KELLY SHUE, 2018. "A Tough Act to Follow: Contrast Effects in Financial Markets," The Journal of Finance, vol 73(4), pages 1567-1613.

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