Does investor short-horizon affect stock mispricing? An empirical study based on higher order expectation theory

Tao Gao, Xiaolei Cui and Longbing Xu

Finance Research Letters, 2025, vol. 79, issue C

Abstract: Using a unique dataset of 11.58 million Chinese investor accounts, we link investor horizons to stock mispricing through higher-order expectations theory. Short-term investors coordinate their trading around public signals, resulting in mispricing. Mechanism tests reveal that short-term investors rely on higher-order expectations (expectations about the expectations of others) rather than fundamentals when making investment decisions. Further analysis reveals that public signals reduce fundamental disagreement but heighten price disagreement, thereby exacerbating mispricing. These findings offer theoretical insights into investor behavior, support the development of behavioral regulations for capital markets, and propose a strategy yielding 7.77% annualized returns.

Keywords: Investor short-horizon; Higher order expectations; Keynesian beauty contest; Mispricing (search for similar items in EconPapers)
JEL-codes: G12 G14 M40 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:79:y:2025:i:c:s1544612325004659

DOI: 10.1016/j.frl.2025.107202

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