Moderated Confidence and Under- and Overreactions to Related Firm's News

39 Pages Posted: 16 Mar 2011 Last revised: 24 Jan 2012

See all articles by Santhosh Ramalingegowda

Santhosh Ramalingegowda

University of Georgia - Terry College of Business

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: Jaunary 22, 2012

Abstract

In a single information transfer setting, we detect both under- and overreactions of stock prices to corporate earnings news. We find that the stock prices of a firm’s blockholder underreact to the firm’s earnings news but the stock prices of the firm overreact to its blockholder’s earnings news. This new evidence of short-term under- and overreactions in a single setting is consistent with the moderated confidence hypothesis, which predicts that investors tend to bias their estimated signal precision toward the unconditional mean, causing predictable under- (over-) reaction to precise (imprecise) signals. Our study suggests that moderated confidence may play an important role in explaining stock market anomalies.

Keywords: Moderated Confidence, Underreaction, Overreaction, Information Transfers

JEL Classification: G12, G10

Suggested Citation

Ramalingegowda, Santhosh and Shu, Tao and Yeung, P. Eric, Moderated Confidence and Under- and Overreactions to Related Firm's News (Jaunary 22, 2012). Available at SSRN: https://ssrn.com/abstract=1785340 or http://dx.doi.org/10.2139/ssrn.1785340

Santhosh Ramalingegowda

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States
706-542-3612 (Phone)

Tao Shu (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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