How Do Investors Determine Stock Prices after Large Price Shocks?

Kevin Brady and Arjan Premti

Journal of Behavioral Finance, 2019, vol. 20, issue 3, 354-368

Abstract: Most large stock price shocks are not accompanied by publicly available information. Then, what other information do investors use to set prices? The authors find that investors rely on reference points and their private information signals. Stocks closer to their 52-week high (52-week low) have negative (positive) returns in the days that follow a large negative (positive) price shock. These results suggest that investors anchor to these reference points and underreact on the event day. The authors also find that future returns drift in the direction of the shock when the stocks’ abnormal returns before the shock are in the opposite direction.

Date: 2019
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DOI: 10.1080/15427560.2018.1511563

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