Does Cross-Sectional Return Extrapolation Explain Anomalies?

51 Pages Posted: 10 Apr 2021 Last revised: 16 Feb 2024

See all articles by Brad Cannon

Brad Cannon

Binghamton University

John Lynch

Hofstra University - Department of Finance

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

Cannon, Brad and Lynch, John, Does Cross-Sectional Return Extrapolation Explain Anomalies? (February 10, 2024). Available at SSRN: https://ssrn.com/abstract=3816782 or http://dx.doi.org/10.2139/ssrn.3816782

Brad Cannon (Contact Author)

Binghamton University ( email )

United States
8015899901 (Phone)

John Lynch

Hofstra University - Department of Finance ( email )

Hempstead, NY 11550
United States

HOME PAGE: http://https://sites.google.com/view/john-lynch/

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