Evidence on the Presence of Representativeness Bias in Investor Interpretation of Consistency in Sales Growth

Anwer S. Ahmed () and Irfan Safdar ()
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Anwer S. Ahmed: Department of Accounting, Mays Business School, Texas A&M University, College Station, Texas 77843
Irfan Safdar: Department of Accounting and Finance, Bryan School of Business, University of North Carolina, Greensboro, North Carolina 27485

Management Science, 2017, vol. 63, issue 1, 97-113

Abstract: We document that consistent patterns of high or low sales growth that are incongruent with underlying fundamentals are followed by significant stock price reversals. In contrast, no stock return reversals are found for firms that achieve the same level of sales growth in an inconsistent manner. Furthermore, future earnings announcement returns mimic the pattern of abnormal stock returns documented for the Consistent- and Inconsistent-Growth portfolios, respectively, corroborating our main findings. Our results are robust to controls for the magnitude of sales growth, fundamental strength, business cycle risk exposures, and standard risk factors. Our evidence is consistent with representativeness bias affecting investor interpretation of consistency in sales growth patterns.

Keywords: representativeness; behavioral finance; asset pricing; fundamental analysis; stock return predictability (search for similar items in EconPapers)
Date: 2017
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