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.     

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.     

Rumors and pre-announcement trading: why sell target stocks before acquisition announcements?

We track trading activity in the days preceding acquisition announcements for target firms and find that abnormally high trading volume precedes significant price movement. Using additional intraday data, we find increased active-selling in target stocks before acquisition announcements that offsets increased active-buying. This is unexpected because sellers often lose money when an acquisition is announced. After ruling out alternative explanations, we find evidence that sellers are rational investors who trade on the market??s perceived overreaction to takeover rumors. While sellers lose money when a rumor precedes an actual announcement, in most cases rumors fail to materialize into public announcements. We provide evidence that the significant pre-announcement volume we document reflects the market??s processing of highly uncertain information in takeover rumors.     

On the Role of Intangible Information and Capital Gains Taxes in Long‐Term Return Reversals

Prior studies have linked long‐term reversals to the magnitude of locked‐in capital gains suggesting that reversals are driven by tax effects and not overreaction. I find that locked‐in capital gains do not explain the reversals in winners when winner returns are based on intangible information. In fact, the reversals for intangible return winners are long lasting and robust to controls for growth in assets and capital expenditures. To the extent that reversals associated with intangible information stem from investors’ overreaction to intangible information and given the prior results linking reversals only to intangible information, my results suggest that overreaction still explains reversal patterns in US stock returns.     

Short-term overreaction to specific events: Evidence from an emerging market

This paper investigates the short-term overreaction to specific events and whether stock prices are predictable in the Egyptian stock exchange (EGX). We find evidence of the short-term overreaction in the EGX. Losers (“bad news” portfolios) significantly outperform winners (“good news” portfolios) and investors can earn abnormal return by selling the winners and buying losers. Terrorist attacks have negative and significant abnormal returns for three days post event followed by price reversals on day four post event. Whereas, the tensions in the Middle East region have a negative and significant abnormal returns on event day followed by price reversals on day one post event. Moreover, the formation of a new government has no effect on the average abnormal returns post event in the EGX. The results also show that small firms tend to have greater price reversals compared to large firms. Overall, our results provide evidence of the leakage of information in the EGX.     

Institutional investor horizon and stock price synchronicity: Do product market competition and analyst coverage matter?

This paper provides new insights into the relation between institutional investment horizon and stock price synchronicity and investigates whether this relationship depends on the intensity of product market competition and analyst coverage. Based on a sample of French listed companies, we find that long-term (short-term) institutional investors are associated with lower (higher) stock price synchronicity. The results also show that the negative effect of long-term institutional investors is more accentuated for firms in less competitive markets and with high analyst coverage. An additional analysis shows that the synchronicity reduction effect does not vary during the financial crisis. Overall, these findings suggest that unlike their short-term counterparts, long term investors reduce asymmetric information and help disseminate firm-specific information into stock prices.     

Sentiment stocks

To study how investor sentiment at the firm level affects stock returns, we match more than 58 million social media messages in China with listed firms and construct a measure of individual stock sentiment based on the tone of those messages. We document that positive investor sentiment predicts higher stock risk-adjusted returns in the very short term followed by price reversals. This association between stock sentiment and stock returns is not explained by observable stock characteristics, unobservable time-invariant characteristics, market-wide sentiment, overreaction to news, or changing investor attention. Consistent with theories of investor sentiment, we find that the link between sentiment and stock returns is mainly driven by positive sentiment and non-professional investors. Finally, exploiting a unique feature of the Chinese stock market, we are able to isolate the causal effect of sentiment on stock returns from confounding factors.     

Investigating the valuation effects of reverse takeovers: evidence from Europe

This study examines a European sample of 222 private firms that opted for going public through a reverse takeover transaction during the period 1992–2011. In particular, our study investigates whether reverse takeovers announcements are value-increasing transactions, especially in countries that follow strong governance structures. Moreover, the post-reverse takeover stock price and operating performance is also at the epicenter of the current study. Employing the classical event study methodology, we document significant wealth gains for the shareholders of public firms involved in reverse takeovers. The market reaction is stronger when stricter corporate governance structures prevail in the countries where public firms trade. However, the short-term gains seem to revert to substantial losses over the long-term lending support to the overreaction phenomenon. We further detect negligible improvement in the post-reverse takeover financial performance of the new entity raising further concerns over the efficacy of such transactions.     

Online Search Frequency,Retail Investor Overreaction,and the Cross-Section of Stock Returns: Evidence from the Chinese Stock Market

I find a strong negative relation between online search frequency and future returns on the Chinese stock market. I suggest that this effect captures retail investor overreaction to unexpected signals, because online search frequency reflects the efforts made by investors to obtain firm-specific knowledge. The effect is particularly strong in stocks with high information uncertainty (high analyst dispersion, big past earnings surprises, low analyst coverage, and large trading volume), whose intrinsic values are difficult or costly for investors to estimate. Online search frequency as a direct indicator of retail investors’ reaction to signals also sheds light on the idiosyncratic volatility (IVOL) puzzle. I find that this puzzle is more pronounced in high-search-frequency subsamples and disappears in low-search-frequency subsamples. Further evidence shows that high search frequency strengthens the negative IVOL effect in stocks with positive signals but weakens this effect in stocks with negative signals. I suggest that the IVOL puzzle in the Chinese market can be partially explained as a reversal following overreaction to positive signals by retail investors.     

Stock Returns following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance

We examine stock returns following large one-day price declines and find that the bid-ask bounce and the degree of market liquidity explain short-term price reversals. Further, we do not find evidence consistent with the overreaction hypothesis. We observe that securities with large one-day price declines perform poorly over an extended time horizon.     

Do markets overreact: International evidence

In this paper, using the Conrad and Kaul's methodology we test for the overreaction hypothesis – which maintains that stock prices systematically overshoot and therefore their reversal can be predicted from past performance — in seven industrialized countries. Consistent with the findings of Conrad and Kaul, we see no evidence of overreaction in the US. However, returns to long-term contrarian strategies in other countries seem to be generally significant. Moreover, we find that in the majority of the countries, while returns to arbitrage portfolios based on price are higher than those based on size, the latter generally outperform the winner–loser arbitrage portfolios.     

News release and the role of different types of investors

We examine how investors react to positive and negative news in the Chinese stock market. We show that positive news is followed by a reversal in stock price, while negative news reports are accompanied by a drift. Using a unique account-level dataset, we find that institutional investors' attention bias contributes to the market's absorption process for different types of news, which is different from the conclusion that the phenomenon is driven by retail investors in the U.S. market. We explain the differences between the two markets as the short-sale constraints induce the attention bias of institutional investors in China. Individual investors are not able to correctly judge the content of news reports, and act as a liquidity provider. We highlight the market regulation plays an important role in the process of investors analyzing information.     

Zero-leverage policy and stock price crash risk: Evidence from Korea

This study examines the difference in stock price crash risk between zero-leverage and non-zero-leverage firms. We find that zero-leverage firms have a significantly higher future stock price crash risk than non-zero-leverage firms. Next, we find that the positive relation between zero-leverage policy and future stock price crash risk is more pronounced when firms have higher controlling shareholders' ownership and foreign ownership. We also find that the positive relation is more pronounced for firms with low cash holdings than for those with high cash holdings. Further, we find that the positive relation is stronger for dividend-paying firms than non-dividend-paying firms. Our results are robust to alternative estimation specifications and endogeneity concerns. Overall, our findings shed light on the extent to which extreme corporate financial policy has an impact on future stock price crash risk. Our empirical evidence also provides meaningful implications for how stakeholders (especially investors) predict stock price crash risk in the context of extremely conservative capital structure.     

Flight-to-safety and retail investor behavior

Flight-to-safety (FTS) episodes are associated with substantial yet short-lived changes in expected returns on equities and bonds. These price changes are typically surrounded by active trading and/or risk transfer between different investors. Using aggregate net exchanges, flows from bond to equity mutual funds, in the US for a period 1984 until 2015, I empirically investigate retail investor behavior around FTS episodes. Overall, I find a reversal statistical relation between net exchanges and market excess returns. A one-standard-deviation shock to net exchanges leads to an increase of market excess return of 1.75%, of which 72% is reversed within 5 months. In particular, FTS episodes are preceded by periods where more risk averse investors, e.g. retail investors, rebalance their portfolios towards risky assets. A trading strategy that is based on signals from past net exchanges outperforms the market portfolio, significantly during FTS periods by 1.4% monthly. However, I find that the observed reversal relationship is not necessarily due to price ‘noise’ induced by uninformed trading. It is more reasonable that the sudden increase in market stress and selling of risky assets is caused by other demand/supply shocks driven by increased economic uncertainty.     

Earnings management and IPO anomalies in China

This paper empirically examines the impact of earnings management and investor sentiment on IPO anomalies using a sample of 506 Chinese IPOs issued over the 1998–2003 period. We develop a parsimonious pricing model in which both the offer price and the short-term aftermarket price are influenced by the use of earnings management, and show that the offer price can be below the fair price while the short-term equilibrium price in the aftermarket can be overvalued due to investor sentiment. Consistent with the overreaction hypothesis, the empirical results reveal a positive relation between the initial return and managed accruals and a negative relation between the long-term stock performance and the initial return. Earnings management appears to generate a pattern where the initial price following an IPO tends to be inflated by overreaction in the secondary market but adjusts to its fundamental level in the long run. These findings are robust across a variety of test specifications.     

Information salience,investor sentiment,and stock returns: The case of British soccer betting

Soccer clubs listed on the London Stock Exchange provide a unique way of testing stock price reactions to different types of news. For each firm, two pieces of information are released on a weekly basis: experts' expectations about game outcomes through the betting odds, and the game outcomes themselves. The stock market reacts strongly to news about game results, generating significant abnormal returns and trading volumes. We find evidence that the abnormal returns for the winning teams do not reflect rational expectations but are high due to overreactions induced by investor sentiment. This is not the case for losing teams. There is no market reaction to the release of new betting information although these betting odds are excellent predictors of the game outcomes. The discrepancy between the strong market reaction to game results and the lack of reaction to betting odds may not only be the result from overreaction to game results but also from the lack of informational content or information salience of the betting information. Therefore, we also examine whether betting information can be used to predict short-run stock returns subsequent to the games. We reach mixed results: we conclude that investors ignore some non-salient public information such as betting odds, and betting information predicts a stock price overreaction to game results which is influenced by investors' mood (especially when the teams are strongly expected to win).     

Who Writes the News? Corporate Press Releases during Merger Negotiations

Firms have an incentive to manage media coverage to influence their stock prices during important corporate events. Using comprehensive data on media coverage and merger negotiations, we find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short‐lived run‐up in bidders' stock prices during the period when the stock exchange ratio is determined, which substantially impacts the takeover price. Our results demonstrate that the timing and content of financial media coverage may be biased by firms seeking to manipulate their stock price.     

信息不对称、过度自信与股价变动

信息传导的非同步和投资者情绪变化是股票市场的两个典型特征,前者会引发投资者之间出现信息不对称问题,后者主要体现为投资者过度自信,两者共同作用影响股票价格变动。本文将信息不对称和投资者过度自信情绪置于同一个分析框架,建立两阶段动态序贯定价理论模型研究现实市场上信息传导过程中股价变动的内在机制。结果表明:(1)面临新信息的进入,投资者对股票收益预期的调整与均衡价格之间具有正相关关系;(2)面临有利消息时,过度自信投资者比例越大,股票的均衡价格越高,投资收益将越低;面临不利消息时则相反;(3)随着过度自信投资者比例以及过度自信程度升高,市场风险溢价将下降;(4)投资者群体在信息传导过程中出现分化,对股价变动形成异质信念,未获取信息和获取信息但未出现过度自信的投资者认为股价被高估,获取信息且出现过度自信的投资者认为价格被低估,促使更多的交易,引发市场成交量和股价变动;(5)过度自信投资者比例与过度自信程度提高均会对市场效率产生正向影响,而对市场深度具有负向效应。最后,基于理论结果对非对称性和持续性等典型的市场波动性特征进行解释。     

短期羊群行为的影响因素与价格效应——基于高频数据的实证检验

通过创新性地使用日内高频交易数据对A股市场中的羊群行为进行研究,本文发现:(1)羊群行为具有短期脆弱性特征,随着度量频率的提高,羊群行为的程度严格递增。(2)信息不对称程度、机构投资者比例、股票规模等因素,会显著影响短期羊群行为程度。(3)短期羊群行为会伴随着明显的价格反转:短期买入(卖出)羊群行为后,股票的超额收益显著为负(正),并且短期羊群行为越显著,价格反转的程度越大。(4)价格反转效应存在不对称性:规模越大、交易越活跃的股票,短期买入羊群行为的价格反转越明显,而短期卖出羊群行为的价格反转越不明显。     

An examination of the relation between asymmetric risk measures,prior returns and expected daily stock returns

We use a sample of individual firm stock returns over the 1988–2009 time period to determine whether: (1) expected daily returns are related to asymmetric risk measures, (2) expected daily returns are related to the directional change of the prior day's price, and (3) our results are robust to the addition of firm size, book-to-market equity and liquidity. We find that investors are compensated for asymmetric risk; however, the positive risk–return relation is present only for our smallest firm quintile. We find a short-term return reversal present in all subgroups, except for the largest firms in our sample. We also document that the low volatility anomaly may be related to firm size and liquidity.