Do Size and Unobservable Company Factors Explain Stock Price Reversals?

Posted: 18 May 2010

See all articles by Robert Clive Cressy

Robert Clive Cressy

Birmingham Business School

Hisham Farag

Birmingham Business School

Date Written: February 2, 2009

Abstract

We use daily price data from the Egyptian stock market and a Loser portfolio of 20 IPOs from the late 1990s that experienced dramatic 1-day price falls in the period 2004 to 2007 to estimate a 2-way fixed effects model of CARs. Observable covariates are company size and turnover growth and unobservables company and period fixed effects. Our results provide evidence of significant price reversal over the first 40 post-event days. Firm size is negatively correlated with post-event CARs, consistently with the argument that small firms have a stronger tendency to price-reverse due to greater informational opacity. But permanent, unobservable company-specific factors, account for a much larger percentage of post-event variation in stock prices and indicate an underlying heterogeneity in investor responses to initial price falls not uncovered before in the literature. Strong negative company effects following a price fall are found to presage reinforcing ‘long term’ price falls and strong positive company effects to presage countervailing ‘long term’ price reversals. At the extremes these company effects are sufficiently large to suggest a trading strategy based on them would be profitable.

Keywords: price reversal, small firm, fixed effects, unobservable

JEL Classification: G14

Suggested Citation

Cressy, Robert C. and Farag, Hisham, Do Size and Unobservable Company Factors Explain Stock Price Reversals? (February 2, 2009). Available at SSRN: https://ssrn.com/abstract=1611238

Robert C. Cressy (Contact Author)

Birmingham Business School ( email )

Elm House
Edgbaston Park Rd
Birmingham
Great Britain
012 1414 5609 (Phone)

Hisham Farag

Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

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