Biased Reactions to Earnings Announcements

Hersh Shefrin

in Beyond Greed and Fear

Published in print October 2002 | ISBN: 9780195161212
Published online November 2003 | e-ISBN: 9780199832996 | DOI:

Series: Financial Management Association Survey and Synthesis Series

 Biased Reactions to Earnings Announcements

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Mispricing is complicated. Sometimes mispricing results in reversals, while at other times it results in momentum. Momentum and reversals co‐exist, despite lying at diametrically opposite ends of the spectrum. The academic scholars participating in the market efficiency debate have been grappling with what this co‐existence means. Proponents of market efficiency view these phenomena as nothing more than random deviations from efficient prices. Proponents of behavioral finance view them as systematic departures from efficient prices. To shed additional light on the co‐existence issue, this chapter is devoted to post‐earnings‐announcement drift, a phenomenon that involves both reversals and momentum.

Keywords: conservatism; continuation; Fuller & Thaler Asset Management; momentum; overreaction; post‐earnings announcement drift; reversals; underreaction

Chapter.  4664 words.  Illustrated.

Subjects: Financial Markets

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