How Quickly do Equity Prices Converge to Intrinsic Value?

19 Pages Posted: 12 Mar 2009  

Dennis R. Capozza

Ross School of Business, University of Michigan

Ryan D. Israelsen

Indiana University - Kelley School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 11, 2009

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

Suggested Citation

Capozza, Dennis R. and Israelsen, Ryan D., How Quickly do Equity Prices Converge to Intrinsic Value? (March 11, 2009). Available at SSRN: https://ssrn.com/abstract=1357841 or http://dx.doi.org/10.2139/ssrn.1357841

Dennis R. Capozza (Contact Author)

Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734 995 7271 (Phone)
734 629-0635 (Fax)

Ryan D. Israelsen

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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