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Overconfident Institutions and Their Self-Attribution Bias: Evidence from Earnings Announcements

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  • Chou, Hsin-I
  • Li, Mingyi
  • Yin, Xiangkang
  • Zhao, Jing

Abstract

Institutional demand for a stock before its earnings announcement is negatively related to subsequent returns. The relation is not attributable to the price pressure of institutional demand and is stronger for stocks with higher information asymmetry and/or greater valuation difficulty. These findings support the notion that overconfident institutions misprice stocks. Following announcements, institutions’ behavior exhibits the outcome-dependent feature of self-attribution bias. Whether they become more overconfident and delay their mispricing correction depends on whether earnings news confirms their preannouncement trades. This behavioral bias also offers a new explanation for the well-known post-earnings-announcement drift.

Suggested Citation

  • Chou, Hsin-I & Li, Mingyi & Yin, Xiangkang & Zhao, Jing, 2021. "Overconfident Institutions and Their Self-Attribution Bias: Evidence from Earnings Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(5), pages 1738-1770, August.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:5:p:1738-1770_8
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    Cited by:

    1. Jaheera Thasleema Abdul Lathief & Sunitha Chelliah Kumaravel & Regina Velnadar & Ravi Varma Vijayan & Satyanarayana Parayitam, 2024. "Quantifying Risk in Investment Decision-Making," JRFM, MDPI, vol. 17(2), pages 1-20, February.

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