A Cross-Industry Analysis Of Investors’ Reaction To Unexpected Market Surprises: Evidence From Nasdaq Sector-Indices

We use daily stock returns from the NASDAQ composite index and its eight composite indexes to investigate the reaction of investors to the arrival of unexpected information in framework of Efficient Market Hypothesis (EMH), the Overreaction Hypothesis (OH), and the Uncertain Information Hy-pothesis (UIH). Consistent with the prediction of the UIH regarding investor behavior, we find strong statistical evidence of a corrective process of significantly positive cumulative abnormal returns following the arrival of both unexpected favorable and unfavorable information for the NASDAQ Composite and four of the sub-indexes. For the Computer and Insurance sub-indices, we observe downward trends in the CARs following the arrival of favorable market surprises and upward trends in response to the ar-rival of unfavorable surprises, a result consistent with the predictions of the OH. For the Industrials and Transportation sectors, the pattern of investors reaction is not strongly consistent with any of the theories of investor reaction presented here, although the trendless pattern of returns following market surprises for the Transportation index could be explained by the EMH. One main implication of these mixed empirical results is that investor ‘s reaction var-ies significantly by sector, highlighting the value of analyzing investor reaction in different segments of the security markets in addition to investigating composite indexes.