The cost of overconfidence in public information

Soosung Hwang, Youngha Cho and Sanha Noh

International Review of Financial Analysis, 2022, vol. 79, issue C

Abstract: We investigate the effects of investor overconfidence in public information on cross-sectional asset returns. The results show that investors in the US equity market are overconfident about public signals for mature firms that are relatively easy to price—old, large, and dividend-paying firms, value firms, and firms with a higher proportion of tangible assets, little external financing, and low sales growth. However, the effects of the overconfidence on cross-sectional stock returns are reversed quickly and comprise more than half of the short-term return reversals. The risk-adjusted cost of being overconfident about the noisy public signals, measured by return reversals of hedge portfolios formed on unexpected responses, is over 1.1% per month in the first month after portfolio formation, and is still significant despite the active arbitrage trading in the 2000s.

Keywords: Overconfidence; Factors; Public signals; Short-term return reversals (search for similar items in EconPapers)
JEL-codes: G12 G41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:79:y:2022:i:c:s1057521921003070

DOI: 10.1016/j.irfa.2021.101991

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