How Quickly do Equity Prices Converge to Intrinsic Value?

Abstract

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.

Keywords: Equity prices, momentum, reversion

JEL Classification: D80, D84, D46, G12, G24, G14