Salience theory and stock prices: Empirical evidence

Mathijs Cosemans and Rik Frehen

Journal of Financial Economics, 2021, vol. 140, issue 2, 460-483

Abstract: We present evidence on the asset pricing implications of salience theory. In our model, investors overweight salient past returns when forming expectations about future returns. Consequently, investors are attracted to stocks with salient upsides, which are overvalued and earn low subsequent returns. Conversely, stocks with salient downsides are undervalued and yield high future returns. We find empirical support for these predictions in the cross section of US stocks. The salience effect is stronger among stocks with greater limits to arbitrage and during high-sentiment periods. Our results are not explained by common risk factors, return reversals, lottery demand, and attention-grabbing news events.

Keywords: Salience theory; Probability weighting; Asset pricing; Return predictability (search for similar items in EconPapers)
JEL-codes: D03 G11 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:140:y:2021:i:2:p:460-483

DOI: 10.1016/j.jfineco.2020.12.012

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