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Individual investor Overextrapolation

Subject

Accounting

Publishing details

Social Sciences Research Network

Authors / Editors

Ertan A;Karolyi S A;Kelly P;Stoumbos R

Biographies

Aytekin Ertan

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

Available on ECCH

No

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