Evidence on Stock Reaction to Market-Wide Information

Ding Du (), Karen Denning () and Xiaobing Zhao ()
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Ding Du: The W. A. Franke College of Business, PO Box 15066, Northern Arizona University, Flagstaff, AZ 86011, USA
Karen Denning: Department of Economics and Finance, Fairleigh Dickinson University Teaneck, New Jersey 07666, USA
Xiaobing Zhao: The W. A. Franke College of Business, PO Box 15066, Northern Arizona University, Flagstaff, AZ 86011, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2011, vol. 14, issue 02, pages 297-325

Abstract: The main purpose of this paper is to show that the lack of misreaction to common information in previous research may be due to methodological weakness. As of now, there is no evidence which suggests that stocks under-react to common information at short horizons and over-react at longer horizons. Even if stocks under- and/or over-react to common information at the security level, the reaction pattern may not be evident at the market level if only some stocks have such a pattern and their capitalization is small. We show in this manuscript that the lack of misreaction to common information in previous research may be due to methodological weakness. By focusing on the stock level reaction, we find a statistically and economically significant reaction pattern to common information as the behavioral models suggest. This finding thus complements the findings of stock misreaction to firm-specific information, and may benefit researchers attempting to understand investor behavior.

Keywords: Market-wide information; intangible information; size factor; behavioral models of asset pricing (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2011
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