Price Shocks, News Disclosures, and Asymmetric Drifts

52 Pages Posted: 8 Aug 2009 Last revised: 13 Jan 2016

See all articles by Hai Lu

Hai Lu

University of Toronto - Rotman School of Management

Kevin Q. Wang

University of Toronto - Joseph L. Rotman School of Management

Xiaolu Wang

Iowa State University

Date Written: December 28, 2013

Abstract

Motivated by investor disagreement and corporate disclosure literatures, we examine how stock price shocks affect future stock returns. We find that both large short-term price drops and hikes are followed by negative abnormal returns over the subsequent year, consistent with the conjecture that price shocks are useful indicators of inter-temporal spikes in investor disagreement and investor opinion converges gradually. The asymmetric drifts, return continuation for negative price shocks versus return reversal for positive ones, are in sharp contrast to the general findings of symmetric drifts in corporate event studies. Moreover, price shocks associated with public news events are followed by significantly weaker downward drifts, suggesting that news disclosures mitigate disagreement-induced overpricing. Examining the dynamics of a disagreement proxy during and after price shocks, we provide further evidence for the disagreement hypothesis. The economic significance of the price shock effect is illustrated with a revised momentum strategy that generates an annualized abnormal return of 16.92 percent.

Keywords: Price shocks, disclosures, disagreement, drift, stock return

JEL Classification: G12, G14, M41

Suggested Citation

Lu, Hai and Wang, Kevin Q. and Wang, Xiaolu, Price Shocks, News Disclosures, and Asymmetric Drifts (December 28, 2013). Accounting Review, Vol. 89, No. 5, 2014, Available at SSRN: https://ssrn.com/abstract=1445095 or http://dx.doi.org/10.2139/ssrn.1445095

Hai Lu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Kevin Q. Wang

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416 946 5059 (Phone)
416 971 3048 (Fax)

Xiaolu Wang

Iowa State University ( email )

2167 Union Drive
Ames, IA 50011
United States

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