Psychological Barriers, Expectational Errors, and Underreaction to News

Charles A. Dice Center Working Paper No. 2014-03

Fisher College of Business Working Paper No. 2014-03-03

51 Pages Posted: 11 Nov 2013 Last revised: 2 Apr 2015

See all articles by Justin Birru

Justin Birru

Ohio State University (OSU) - Department of Finance

Date Written: January 23, 2015

Abstract

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

Birru, Justin, Psychological Barriers, Expectational Errors, and Underreaction to News (January 23, 2015). Charles A. Dice Center Working Paper No. 2014-03; Fisher College of Business Working Paper No. 2014-03-03. Available at SSRN: https://ssrn.com/abstract=2352474 or http://dx.doi.org/10.2139/ssrn.2352474

Justin Birru (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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