Returns to Contrarian Investment: Tests of the Naive Expectations Hypotheses

Posted: 6 Jul 1995

See all articles by Patricia Dechow

Patricia Dechow

USC Marshall School of Business

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 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 Dechow

USC Marshall School of Business ( email )

Los Angeles, CA 90089-0441
United States

Richard G. Sloan (Contact Author)

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

Los Angeles, CA 90089-0441
United States

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