Individual investor Overextrapolation
Subject
Accounting
Publishing details
Social Sciences Research Network
Authors / Editors
Ertan A; Karolyi S A; Kelly P; Stoumbos R
Biographies
Publication Year
2016
Abstract
We find that individual investors overextrapolate earnings announcement (EA) performance and offer overextrapolation as a parsimonious explanation for return predictability around EAs. Investors are overly optimistic about future earnings if recent earnings surprises were high, and are more likely to purchase stock immediately before the upcoming EA if recent EA returns were high. This purchasing behavior is associated with predictable increases in prices before EAs and predictable decreases afterwards, consistent with overextrapolation. Portfolios formed using these sources of return predictability both earn over 17 basis points per day, suggesting that overextrapolation driven purchasing behavior has economically significant effects on prices.
Keywords
Extrapolation; Earnings; Earnings announcement returns; Behavioral finance; Retail investors
Publication Notes
7th Miami Behavioral Finance Conference 2016
Series
Social Sciences Research Network