How Quickly do Equity Prices Converge to Intrinsic Value?
Dennis R. Capozza
The Stephen M. Ross School of Business at the University of Michigan
Ryan D. Israelsen
Indiana University Bloomington - Department of Finance
March 11, 2009
This research hypothesizes that in markets where information costs, transactions costs and the economic impact of information can vary widely, we should expect both significant predictability and systematic variation in the predictability. Controlling for other factors, we find that on average, 15-30% of the difference between the stock price and the estimated intrinsic value is removed in a year. We document that levels of predictability vary with firm characteristics like leverage, size and number of analysts. Momentum is stronger for larger firms with more analysts. Reversion to the intrinsic value is greater for smaller firms with more analysts.
Number of Pages in PDF File: 19
Keywords: Equity prices, momentum, reversion
JEL Classification: D80, D84, D46, G12, G24, G14working papers series
Date posted: March 12, 2009
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