Does Bad Economic News Play a Greater Role in Shaping Investors’ Expectations than Good Economic News?
32 Pages Posted: 18 Jun 2010 Last revised: 22 Jun 2010
Date Written: June 17, 2010
Using consistency in monthly returns as a proxy for good and bad news, I show that investors overreact to a series of favorable and unfavorable news. However, bad news plays a greater role in shaping investors’ expectations than good news. Consistent losers exhibit stronger price momentum in Year 1 followed by a more pronounced and persistent price reversal in Years 2 through 5 relative to their consistent winner counterparts. This evidence is robust to the three-factor Fama-French model and momentum factor. Results reported in this study provide general support to the psychology-based theories, but none of the existing models fully captures the weighting differential that negative and positive information signals play in shaping investors’ expectations.
Keywords: Good and bad economic news, Return consistency, Shaping investors’ expectation, Consistent winners, Consistent losers, Momentum, Reversal
JEL Classification: G11, G14
Suggested Citation: Suggested Citation