Psychological Barriers, Expectational Errors, and Underreaction to News
Charles A. Dice Center Working Paper No. 2014-03
51 Pages Posted: 11 Nov 2013 Last revised: 2 Apr 2015
Date Written: January 23, 2015
This paper provides evidence that the 52-week high serves as a psychological barrier, inducing expectational errors and underreaction to news. Two clear predictions emerge and are confirmed in the data. First, nearness to a 52-week high induces expectational errors; evidence from earnings surprises and analyst price targets indicate that investor and analyst expectations are biased in a downward direction for stocks near a 52-week high and biased in an upward direction for stocks trading far from a 52-week high. Second, nearness to a 52-week high induces underreaction to news. Among positive earnings surprise stocks, post-announcement drift exists only for those stocks near a 52-week high. The evidence suggests that in contrast to currently offered preference-based explanations, a belief-based explanation may better explain the previously documented 52-week high anomalies.
Keywords: 52-week high, behavioral biases, underreaction, earnings announcements
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation