Identifying overvalued equity

Messod D. Beneish and David Craig Nichols

Review of Financial Economics, 2023, vol. 41, issue 4, 408-436

Abstract: We develop a profile of overvalued equity, and show that firms meeting this profile experience abnormal stock returns net of transaction costs of −22% to −25% over the 12 months following portfolio formation. We show our model is distinct from predictors proposed in prior work, and our results robust to alternative measurements of expected returns. We also show that overvaluation is not confined to small firms and that institutions do not trade as if they identify overvalued equity. The profitable predictability we document suggests a pricing anomaly relating to the 2.5% of the firms in the population that our model identifies as substantially overvalued. Although we believe markets are generally efficient within the bounds of transaction costs, our evidence suggests that violations of minimally rational use of publicly available information do occur. To the extent that anomalies disappear or attenuate once documented in the literature (Doukas et al., 2002 [European Financial Management, 2002, 8, 229]; Schwert, 2003 [Handbook of the Economics of Finance, 2003, 1, 939]), our results are of interest to financial economists and investors.

Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/rfe.1182

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:41:y:2023:i:4:p:408-436

Access Statistics for this article

More articles in Review of Financial Economics from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().