Market Reactions to Tangible and Intangible Information

49 Pages Posted: 19 Jun 2001

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 24, 2001

Abstract

Previous empirical studies suggest a negative relationship between prior 3-5 year fundamental performance and future returns: distressed firms outperform more profitable firms. In fact, we show here that after controlling for past stock returns firms with higher past fundamental returns actually outperform weaker firms. Our results are consistent with investors reacting appropriately to tangible information (defined as information which can be extracted from financial statements), but overreacting to intangible information. We explain these findings with a simple model based on the behavioral finding that investors are more overconfident about their ability to interpret intangible information. Finally, we reconcile our results with previous studies, and show that firms which grow through shareissuance activity experience low future returns, while firms that grow through increased profitability do not.

JEL Classification: G1

Suggested Citation

Daniel, Kent D. and Titman, Sheridan, Market Reactions to Tangible and Intangible Information (May 24, 2001). EFMA 2001 Lugano Meetings. Available at SSRN: https://ssrn.com/abstract=274204 or http://dx.doi.org/10.2139/ssrn.274204

Kent D. Daniel

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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Sheridan Titman (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
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United States
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512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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