Information Uncertainty and Expected Returns

Guohua Jiang, Charles M. C. Lee () and Yi Zhang
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Guohua Jiang: Peking University
Charles M. C. Lee: Cornell University
Yi Zhang: Barclays Global Investors

Review of Accounting Studies, 2005, vol. 10, issue 2, No 4, 185-221

Abstract: Abstract This study examines the role of information uncertainty (IU) in predicting cross-sectional stock returns. We define IU in terms of “value ambiguity,” or the precision with which firm value can be estimated by knowledgeable investors at reasonable cost. Using several different proxies for IU, we show that (1) on average, high-IU firms earn lower future returns (the “mean” effect), and (2) price and earnings momentum effects are much stronger among high-IU firms (the “interaction” effect). These findings are consistent with analytical models in which high IU exacerbates investor overconfidence and limits rational arbitrage.

Keywords: behavioral finance; cross-sectional returns; information uncertainty; risk (search for similar items in EconPapers)
JEL-codes: G12 G14 M41 (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s11142-005-1528-2

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