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

Michael Kaestner
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Michael Kaestner: GESEM, Center for Research in Finance, Montpellier University, France

Finance from EconWPA

Abstract: 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.

Keywords: Behavioral finance; overreaction; representativeness bias; earnings announcements (search for similar items in EconPapers)
JEL-codes: G14 D84 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg
Date: 2005-05-22, Revised 2005-10-03
Note: Type of Document - pdf; pages: 17
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