The cost of overconfidence in public information |
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| Institution: | 1. Department of Economics, Sungkyunkwan University, 25-2 Sungkyunkwan-Ro, Jongno-gu, Seoul 03063, South Korea;2. School of the Built Environment, Oxford Brookes University, Gipsy Lane, Oxford OX3 0BP, UK;3. Department of Economics, Jeonbuk National University, 567 Baekje-daero, Geumam 1(il)-dong, Deokjin-gu, Jeonju-si, Jeollabuk-do, South Korea;1. Department of Economics, Sungkyunkwan University, Seoul, Republic of Korea;2. McIntire School of Commerce, University of Virginia, Charlottesville, VA, U.S.A;3. Global Finance Research Center, Sungkyunkwan University, Seoul, Republic of Korea;1. Urban Institute, Kyushu University, Fukuoka, Japan;2. Energy Studies Institute, National University of Singapore, Singapore;3. Stern School of Business, New York University, New York, USA;1. Bay Atlantic University, USA;2. Rutgers University, USA;3. Bahçe?ehir University, TR, Turkey;1. Business Administration Department, IQRA University, Islamabad, Pakistan;2. Department of Business & Management, LUISS Guido Carli University, Rome, Italy |
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| Abstract: | We investigate the effects of investor overconfidence in public information on cross-sectional asset returns. The results show that investors in the US equity market are overconfident about public signals for mature firms that are relatively easy to price—old, large, and dividend-paying firms, value firms, and firms with a higher proportion of tangible assets, little external financing, and low sales growth. However, the effects of the overconfidence on cross-sectional stock returns are reversed quickly and comprise more than half of the short-term return reversals. The risk-adjusted cost of being overconfident about the noisy public signals, measured by return reversals of hedge portfolios formed on unexpected responses, is over 1.1% per month in the first month after portfolio formation, and is still significant despite the active arbitrage trading in the 2000s. |
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