Contrarian Profits and the Overreaction Hypothesis: the Case of the Athens Stock Exchange

This paper investigates the existence of contrarian profits and their sources for the Athens Stock Exchange (ASE). The empirical analysis decomposes contrarian profits to sources due to common factor reactions, overreaction to firm‐specific information, and profits not related to the previous two terms, as suggested by Jegadeesh and Titman (1995). Furthermore, in view of recent evidence that common stock returns are related to firm characteristics such as size and book‐to‐market equity, the paper decomposes contrarian profits to sources due to factors derived from the Fama and French (1993, 1996) three‐factor model. For the empirical testing, size‐sorted sub‐samples that are rebalanced annually are employed, and in addition, adjustments for thin and infrequent trading are made to the data. The results indicate that serial correlation is present in equity returns and that it leads to significant short‐run contrarian profits that persist even after we adjust for market frictions. Consistent with findings for the US market, contrarian profits decline as one moves from small stocks to large stocks, but only when market frictions are considered. Furthermore, the contribution to contrarian profits due to the overreaction to the firm‐specific component appears larger than the underreaction to the common factors.     

Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies

Various theories have been proposed to explain momentum in stock returns. We test the gradual-information-diffusion model of Hong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work better among stocks with low analyst coverage. Finally, the effect of analyst coverage is greater for stocks that are past losers than for past winners. These findings are consistent with the hypothesis that firm-specific information, especially negative information, diffuses only gradually across the investing public.     

Star Analysts,Overreaction, and Synchronicity: Evidence from China and the United States

This paper examines star analyst coverage, investor overreaction, and stock price synchronicity in the Chinese and US markets. In China, we find that star analyst coverage can induce investor overreaction, such that it is negatively correlated with price synchronicity. This overreaction effect is particularly pronounced for stocks with primarily individual investors. In contrast, in the United States, we find that star analyst coverage is positively related to synchronicity and is not significantly associated with investor overreaction. Our overall findings imply that the heterogeneous nature of investors in a market drives the association among star analyst coverage, overreaction, and stock price synchronicity.     

Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms

This study examines the ability of analysts to forecast future firm performance, based on the selective coverage of newly public firms. We hypothesize that the decision to provide coverage contains information about an analyst's underlying expectation of a firm's future prospects. We extract this expectation by obtaining residual analyst coverage from a model of initial analyst following. We document that in the three subsequent years, initial public offerings with high residual coverage have significantly better returns and operating performance than those with low residual coverage. This evidence indicates analysts have superior predictive abilities and selectively provide coverage for firms about which their true expectations are favorable.     

Effects of order flow imbalance on short-horizon contrarian strategies in the Australian equity market

We use Lo and MacKinlay's [Lo, A.W., MacKinlay, C., 1990. When are contrarian profits due to stock market overreaction? The Review of Financial Studies 3, 175–205.] contrarian portfolio approach to examine the profitability of short-horizon contrarian strategies in the context of the Australian Stock Exchange. The results show that simple contrarian strategies lead to small but still statistically significant profits when applied to daily and intra-day portfolio formation. However, the profits are not sufficient to cover transaction costs for institutional investors. The source of contrarian profits is also analyzed leading to the conclusion that stock market overreaction is found to be the primary source of contrarian profits. We also examine the relation between the degree of return reversal and order flow activity after abnormal price changes. We find that the degree of return reversal is positively related to the level of order flow imbalance. Larger profits are generated from order flow based contrarian strategies when the order flow imbalances are high.     

Contrarian and momentum profitability revisited: Evidence from the London Stock Exchange 1964–2005

We provide evidence relating to contrarian and momentum profits for the LSE, using 64 strategies for all 6531 stocks traded from 1964 to 2005. Thorough analysis demands controlling for key potential (contradictory) explanations of the strategies’ profitability which span psychological characteristics (e.g. overreaction/underreaction), excess risk, seasonality, size, and microstructure induced biases. Results provide a measurement of the miscalculations which occur when ignoring survivorship and microstructure biases. Contrarian/momentum profits cannot be explained by seasonality, size, or a single factor risk model. However, the Fama–French three factor model rationalises all contrarian profits. Important differences are found when examining a truncated sample period demonstrating the need to recognise that financial markets can change markedly through time.     

Stock market liquidity and firm value

This paper investigates the relation between stock liquidity and firm performance. The study shows that firms with liquid stocks have better performance as measured by the firm market-to-book ratio. This result is robust to the inclusion of industry or firm fixed effects, a control for idiosyncratic risk, a control for endogenous liquidity using two-stage least squares, and the use of alternative measures of liquidity. To identify the causal effect of liquidity on firm performance, we study an exogenous shock to liquidity—the decimalization of stock trading—and show that the increase in liquidity around decimalization improves firm performance. The causes of liquidity's beneficial effect are investigated: Liquidity increases the information content of market prices and of performance-sensitive managerial compensation. Finally, momentum trading, analyst coverage, investor overreaction, and the effect of liquidity on discount rates or expected returns do not appear to drive the results.     

Is the Mean Return of Hotel Real Estate Stocks Apt to Overreact to Past Performance?

This study examines the return patterns of hotel real estate stocks in the U.S. during the period from 1990 to 2007.We find that the magnitude and persistence of future mean returns of hotel real estate stocks can be predicted based on past returns, past earnings surprise, trading volume, firm size, and holding period. The empirical evidence found from this paper confirms that short-horizon contrarian profits can be partially explained by the lead-lag effects, while in the intermediate-term price momentum profits and long-term contrarian profits can be partially attributed to the firms’ overreaction to past price changes. Our results support the contrarian/overreaction hypothesis, and they are inconsistent with the Fama-French risk-based hypothesis or the underreaction hypothesis. The study also confirms the earning underreaction hypothesis and finds the high volume stocks tend to earn high momentum profits in the intermediate-term. The study finds that the earning momentum effect for hotel stocks is more short-lived and smaller in magnitude than the market average. Price momentum portfolios (or contrarian portfolios) of big hotel firms underperform small hotel firms and the hotel price momentum portfolio (or contrarian portfolios) significantly underperform the overall market over the intermediate-term (or the long-term). These findings imply that the U.S. hotel industry, particularly the big hotel firms, have experienced relatively conservative growth in the sample period. It suggests that a conservative hotel growth strategy accompanied by an internal-oriented financing policy is proper in a period of prosperity.     

Analyst Coverage and Intangible Assets

This study examines the relation between analysts' incentives to cover firms and the extent of their intangible assets. Because intangible assets typically are unrecognized and estimates of their fair values are not disclosed, absent analyst coverage firms with more intangible assets likely have less informative prices. Accordingly, we expect analysts have greater incentives to cover firms with more intangible assets and, thus, predict they have higher analyst coverage. As predicted, we find that analyst coverage is significantly greater for firms with larger research and development and advertising expenses relative to their industry, and for firms in industries with larger research and development expense. We also predict and find that analyst coverage is increasing in firm size, growth, trading volume, equity issuance, and perceived mispricing, and is decreasing in the size of the firm's analysts' brokerage houses and the effort analysts expend to follow the firm. These findings indicate that analyst coverage depends on private benefits and costs of covering a firm. We also test hypotheses related to analyst effort. We predict and find that analysts expend greater effort to follow firms with more intangible assets, after controlling for other factors associated with analyst effort. Our evidence indicates that intangible assets, most of which are not recognized in firms' financial statements, are associated with greater incentives for analysts to cover such firms, and greater costs of coverage. An open question is whether financial statement recognition of intangible assets could more efficiently provide information about such assets to investors.     

Do analysts follow emerging economy firms with higher intangible assets? Empirical evidence from Egypt

This paper tests whether analyst coverage and effort are related to the level of intangible assets reported by Egyptian listed firms. Intangible assets represent increasingly important investments for many firms, but most of these assets are not capitalized under prevailing accounting standards. Analysts reduce the information asymmetry by examining both financial reports and other information. Many Egyptian firms today seek access to foreign capital. I hypothesize that the larger the potential intangible assets of firms the more analysts will cover these firms and pursue private information about these firms. Sample consists of 435 firm-year observations over the period 1999–2007, and intangible assets are measured using eight different firm- and industry-level proxies. Consistent with prior research, results suggest that coverage is significantly associated with firm R&D, industry advertising expenses, firm size, and trading volume. Results also suggest that analyst effort is a function of firm and industry-level R&D expenses and firm size.     

Investor attention and information diffusion from analyst coverage

This study examines the impact of investor attention and analyst coverage on the diffusion of information. Using trading turnover as a proxy for investor attention, the results show that attention is crucial to the information diffusion from financial analysts. The effect of analyst coverage on improving stock synchronicity is greater when investors are more attentive. Firms with less analyst coverage rely more heavily on investor attention to assimilate information. The lead–lag effect in high and low analyst-following firms is driven by the relative more attention given to firms that have high analyst coverage.     

Investment analysis and the adjustment of stock prices to common information

In this article we are concerned with the effect of the numberof investment analysts following a firm on the speed of adjustmentof the firm's stock price to new information that has commoneffects across firms. It is found that returns on portfoliosof firms that are followed by many analysts tend to lead thoseof firms that are followed by fewer analysts, even when thefirms are of approximately the same size. Many analyst firmsalso tend to respond more rapidly to market returns than dofew analyst firms, adjusting for firm size. This relation, however,is nonlinear, and the marginal effect of the number of analystson the speed of price adjustment increases with the number ofanalysts.     

Analyst talent,information, and insider trading

We examine 1984–2018 data and show that the talent or ability of sell-side financial analysts affects a covered firm's information environment—more so than the simple number of analysts covering a firm. We find that while analysts in general produce market and industry-level information, high-ability analysts contribute more firm-specific information. Firms covered by high-ability analysts experience significantly less insider trading prior to positive earnings news. Results only reside in opportunistic (not routine) trades. When an analyst initiates (terminates) coverage we find decreased (increased) subsequent insider trading. Both changes are primarily driven by analyst talent. Analyst ability also negatively relates to insider trading profitability.     

Do analysts affect bad news timeliness?

I investigate the effect of analysts on the speed with which bad news is reflected in earnings. Intuitively, the more analysts that cover a firm, the more costly it will be for the firm to keep bad news suppressed. Thus, analyst coverage should positively affect bad news timeliness (BNT) (but not necessarily the differential timeliness of bad news over good news, or conditional conservatism). Using brokerage house mergers as a natural experiment with a difference-in-differences design, I find that an exogenous decrease in analyst coverage decreases BNT; that is, analysts positively affect BNT. The decrease in BNT is robust to controlling for unobserved firm heterogeneity, using a propensity score matched sample, persists for up to three years after the brokerage house merger, and is stronger for firms with relatively low analyst coverage before the merger. The result improves our understanding of how analysts affect a firm's information environment.     

ADRs,Analysts, and Accuracy: Does Cross Listing in the United States Improve a Firm's Information Environment and Increase Market Value?

This paper investigates the relation between cross listing in the United States and the information environment of non‐U.S. firms. We find that firms that cross list on U.S. exchanges have greater analyst coverage and increased forecast accuracy than firms that are not cross listed. A time‐series analysis shows that a change in analyst coverage and forecast accuracy occurs around cross listing. We also document that firms that have more analyst coverage and higher forecast accuracy have higher valuations. Furthermore, the change in firm value around cross listing is correlated with changes in analyst following and forecast accuracy, suggesting that cross listing enhances firm value through its effect on the firm's information environment. Our findings support the hypothesis that cross‐listed firms have better information environments, which are associated with higher market valuations.     

Does intellectual capital disclosure in analysts' reports vary by firm characteristics?

In this paper, we explore how Australian sell-side financial analysts contribute to the supply of intellectual capital (IC) information in the capital market. Toward this end, we examine how types and semantic properties of IC disclosures in analyst reports vary by a number of firm-specific characteristics likely to be associated with voluntary corporate disclosure. Consistent with our expectations, we find that the uncertainty associated with forecasting firm's earnings and the IC intensity of the industry in which the firm operates are associated positively with the extent as well as several semantic properties of IC disclosure in analyst reports. Highlighting that IC disclosure in analyst reports is not always a function of the extent of IC disclosed by firm, we find a statistically significant but negative association between firm profitability and the extent and certain semantic properties of IC disclosure in analyst reports. Firm size was significantly and positively associated with only the extent of forward-looking IC disclosure. Of the three categories of IC, only relation capital disclosure varied with any of the explanatory variables. Our findings highlight the importance of analyst reports as an IC communication media that could complement corporate communications of IC not only for firms disclosing less IC information voluntarily but also for those firms known to disclose more.     

Momentum trading,mean reversal and overreaction in Chinese stock market

The vast majority of the literature reports momentum profitability to be overwhelming in the US market and widespread in other countries. However, this paper finds that the pure momentum strategy in general does not yield excess profitability in the Chinese stock markets. We find instead strong mean reversion with an average half-life slightly shorter than 1 year. A pure contrarian investment strategy produces positive excess returns and in general outperforms the pure momentum strategy. Furthermore, momentum may interact with mean reversion. A strategy based on the rolling-regression parameter estimates of the model combining mean reversion and momentum generates both statistically and economically significant excess returns. The combined strategy outperforms both pure momentum and pure contrarian strategies. We conduct a number of robustness tests and confirm the basic findings. Collectively, our results support the overreaction hypothesis.     

Short-term Contrarian Strategies in the London Stock Exchange: Are They Profitable? Which Factors Affect Them?

Abstract:  This paper provides evidence on short-term contrarian profits and their sources for the London Stock Exchange. Profits are decomposed to sources due to factors derived from the Fama and French (1996) three-factor model. For the empirical testing, size-sorted sub-samples are used, and adjustments for infrequent trading and bid-ask biases are also made. Results indicate that UK short-term contrarian strategies are profitable and more pronounced for extreme market capitalization stocks. These profits persist even when the sample is adjusted for market frictions, risk, seasonality, and irrespective of whether equally-weighted or value-weighted portfolios are employed. The most important factor that drives contrarian profits appears to be investor overreaction to firm-specific information.     

Do Analysts Influence Corporate Financing and Investment?

We examine whether abnormal analyst coverage influences the external financing and investment decisions of the firm. Controlling for self-selection bias in analysts' excessive coverage, we find that firms with high (low) analyst coverage consistently engage in higher (lower) external financing than do their industry peers of similar size. Our evidence also demonstrates that firms with excessive analyst coverage overinvest and realize lower future returns than do firms with low analyst coverage. Our findings are consistent with the hypothesis that analysts favor the coverage of firms that have the potential to engage in profitable investment-banking business.     

Analyst following,staggered boards,and managerial entrenchment

We use agency theory to explore how analyst coverage is influenced by the managerial entrenchment associated with the staggered board. The evidence suggests that firms with staggered boards attract significantly larger analyst following. We also document that firms with staggered boards experience less information asymmetry. Staggered boards insulate managers from the discipline of the takeover market. Entrenched managers are well-protected by the staggered board and have fewer incentives to conceal information, resulting in less information asymmetry. The more transparent information environment facilitates the analyst’s job. As a consequence, more analysts are attracted to firms with staggered boards. We also document the beneficial role of analyst coverage in improving firm value. Our results confirm the notion that analysts, as information intermediaries, provide oversight over management and thus help alleviate agency conflicts. The positive effect of analyst coverage, however, is severely reduced when the firm has a staggered board in place.