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Does Information Acquisition Alleviate Market Anomalies? Categorization Bias in Stock Splits

Author

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  • Dongmin Kong
  • Chen Lin
  • Shasha Liu

Abstract

Using a unique proprietary account-level trading dataset in China, we investigate how active information acquisition alleviates price-based return comovement, a typical anomaly in stock splits. We find that: 1) individual trading drives the comovement and the trading correlation between split stocks and the low-price portfolio increases significantly after splits; 2) individuals can learn the firm fundamentals through information acquisition, which effectively alleviates their categorized bias; and 3) the role of information acquisition is more significant in environments characterized by greater uncertainty. Our results are robust to different specifications and alternative measures. Taken together, this paper emphasizes the important role of information acquisition in alleviating behavioral bias and improving decision-making.

Suggested Citation

  • Dongmin Kong & Chen Lin & Shasha Liu, 2019. "Does Information Acquisition Alleviate Market Anomalies? Categorization Bias in Stock Splits," Review of Finance, European Finance Association, vol. 23(1), pages 245-277.
    • Handle: RePEc:oup:revfin:v:23:y:2019:i:1:p:245-277.
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    File URL: http://hdl.handle.net/10.1093/rof/rfx028
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    Citations

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    Cited by:

    1. Cheema, Arbab K. & Eshraghi, Arman & Wang, Qingwei, 2023. "Macroeconomic news and price synchronicity," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 390-412.
    2. Chen, Fu & Huang, Zhi-xiong & Wang, Fang & Xie, Zongyu, 2022. "Can corporate social responsibility disclosure alleviate asset price volatility? Evidence from China," Economic Modelling, Elsevier, vol. 116(C).
    3. Wang, Kai & Li, Tingting & San, Ziyao & Gao, Hao, 2023. "How does corporate ESG performance affect stock liquidity? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    4. Chen, Xing & Diao, Xundi & Wu, Chongfeng, 2022. "Heterogeneous investor attention and post earnings announcement drift: Evidence from China," Economic Modelling, Elsevier, vol. 110(C).
    5. Kong, Dongmin & Ji, Mianmian & Liu, Shasha, 2022. "Does the mandatory disclosure of audit information affect analysts' information acquisition?," International Review of Financial Analysis, Elsevier, vol. 83(C).
    6. Kong, Dongmin & Lin, Zhiyang & Wang, Yanan & Xiang, Junyi, 2021. "Natural disasters and analysts' earnings forecasts," Journal of Corporate Finance, Elsevier, vol. 66(C).
    7. Tao Chen & Andreas Karathanasopoulos & Stanley Iat-Meng Ko & Chia Chun Lo, 2020. "Lucky lots and unlucky investors," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 735-751, February.

    More about this item

    Keywords

    Information acquisition; Comovement; Investor trading behavior; Stock splits;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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