Does Cross-Sectional Return Extrapolation Explain Anomalies?
51 Pages Posted: 10 Apr 2021 Last revised: 16 Feb 2024
Date Written: February 10, 2024
Abstract
We provide evidence that dividend-paying stocks are less exposed to return extrapolation than non-dividend-paying stocks (capital-gain stocks). In particular, social media sentiment and analyst price targets of capital-gain stocks are each significantly more sensitive to past returns. Consistent with models of return extrapolation, capital-gain stocks earn higher momentum and long-term reversal returns. The significant difference in returns is not explained by factors nor stock characteristics related to dividend status. The value premium, however, is similar among both groups. Collectively, our findings suggest that return extrapolation may be an important source of some anomaly returns.
Keywords: Return Extrapolation, Dividends, Beliefs, Anomalies
JEL Classification: G11, G12, G41
Suggested Citation: Suggested Citation