Returns to Contrarian Investment: Tests of the Naive Expectations Hypotheses

Posted: 6 Jul 1995

See all articles by Patricia M. Dechow

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting; University of California, Berkeley - Accounting Group

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Date Written: November 1995

Abstract

This paper examines the ability of hypotheses based on naive investor expectations to explain the higher returns to contrarian investment strategies. Inconsistent with Lakonishok, Shleifer and Vishny (1995), we find no systematic evidence that stock prices naively reflect extrapolation of past trends in earnings and sales growth. Consistent with Bauman and Dowen (1988) and La Porta (1994), we find that stock prices appear to naively reflect analysts' biased forecasts of future earnings growth. Further, we show that naive reliance on analysts' forecasts of future earnings growth can explain over half the higher returns to contrarian investment strategies.

JEL Classification: D84

Suggested Citation

Dechow, Patricia M. and Sloan, Richard G., Returns to Contrarian Investment: Tests of the Naive Expectations Hypotheses (November 1995). Available at SSRN: https://ssrn.com/abstract=2539

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Richard G. Sloan (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
2,797
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information