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

Abstract

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

Alwathainani, Abdulaziz M., Does Bad Economic News Play a Greater Role in Shaping Investors’ Expectations than Good Economic News? (June 17, 2010). Available at SSRN: https://ssrn.com/abstract=1626274 or http://dx.doi.org/10.2139/ssrn.1626274

Abdulaziz M. Alwathainani (Contact Author)

Alfaisal University ( email )

P.O. Box 50927
Riyadh, 11533
Saudi Arabia

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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