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Anomalous Price Behavior Following Earnings Surprises: Does Representativeness Cause Overreaction?

Author

Listed:
  • Michael Kaestner

    (GESEM, Center for Research in Finance, Montpellier University, France)

Abstract

Behavioral Finance aims to explain empirical anomalies by introducing investor psychology as a determinant of asset pricing. This study provides strong evidence that anomalous stock price behavior following earnings announcements is due to a representativeness bias. It investigates current and past earnings surprises and subsequent market reaction for listed US companies over the period 1983-1999. The results suggest that investors overreact to past earnings surprises. As, on average, extreme past surprises are not confirmed by actual earnings figures, they are followed by stock market reactions of the opposite sign. Moreover, the longer the similar earnings surprise series, the higher the subsequent reversal.

Suggested Citation

  • Michael Kaestner, 2005. "Anomalous Price Behavior Following Earnings Surprises: Does Representativeness Cause Overreaction?," Finance 0505018, University Library of Munich, Germany, revised 03 Oct 2005.
    • Handle: RePEc:wpa:wuwpfi:0505018
    Note: Type of Document - pdf; pages: 17
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0505/0505018.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Behavioral finance; overreaction; representativeness bias; earnings announcements;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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