Over-Reliance on Previous Periods' Earnings Can Cause Post-Earnings-Announcement Drift and Over-Reactions to Extreme Performance

37 Pages Posted: 18 Oct 1998

See all articles by Robert J. Bloomfield

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

Robert Libby

Cornell University - Samuel Curtis Johnson Graduate School of Management

Mark W. Nelson

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: September 14, 1998

Abstract

This paper uses a laboratory experiment to show that investors systematically over-rely on firms' previous performance levels: when previous performance is high (low), prices are too high (low). This error creates two types of anomalies. Too much reliance on previous levels gives the appearance that investors under-react to changes in performance from that level. Prices therefore remain too low (high) after large increases (decreases) in performance, similar to the post-earnings-announcement drift anomaly. Too much reliance on previous levels also gives the appearance that investors overestimate the degree to which extreme performance in prior periods leads to extreme performance in the target period. Prices therefore remain too high (low) after persistently strong (weak) performance, similar to the long-term over-reaction anomaly. The results therefore suggest that these two anomalies may be caused by a single behavioral effect.

JEL Classification: G12, M41, C92

Suggested Citation

Bloomfield, Robert J. and Libby, Robert and Nelson, Mark W., Over-Reliance on Previous Periods' Earnings Can Cause Post-Earnings-Announcement Drift and Over-Reactions to Extreme Performance (September 14, 1998). Available at SSRN: https://ssrn.com/abstract=132149 or http://dx.doi.org/10.2139/ssrn.132149

Robert J. Bloomfield (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

Robert Libby

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3348 (Phone)
607-254-4590 (Fax)

Mark W. Nelson

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

448 Sage Hall
Ithaca, NY 14853
United States
607-255-6323 (Phone)
607-254-4590 (Fax)

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