On the Efficiency of Intra-Industry Information Transfers: The Dilution of the Overreaction Anomaly

Posted: 9 Nov 2016

See all articles by Dennis Y. Chung

Dennis Y. Chung

Simon Fraser University

Karel Hrazdil

Simon Fraser University

Kim Trottier

Simon Fraser University

Date Written: Novemeber 2015

Abstract

We revisit the stock market anomaly documented by Thomas and Zhang (2008) and show that the apparent mispricing of information transfers has decayed over time, as the US markets experienced rapid improvements in the efficiency of the underlying price formation processes. Utilizing recent advancements in market microstructure research to estimate firm-specific proxies for market efficiency, we demonstrate that the existence of the overreaction anomaly (where stock prices of late announcers in response to the earnings reported by early announcers in the same industry are negatively related to subsequent price responses of late announcers to their own earnings reports) is specific to an earlier sample period and results from the inefficient incorporation of information into prices, largely attributable to an environment with high barriers to arbitrage. Our results indicate that the pricing efficiency of intra-industry information transfers has increased in the recent years of increased liquidity and markedly higher trading activity.

Keywords: Information Transfers, Market Efficiency, Overreaction Anomaly

JEL Classification: G12, G14

Suggested Citation

Chung, Dennis Y. and Hrazdil, Karel and Trottier, Kim, On the Efficiency of Intra-Industry Information Transfers: The Dilution of the Overreaction Anomaly (Novemeber 2015). Journal of Banking and Finance, Vol. 60, pp. 153-167, November 2015, Available at SSRN: https://ssrn.com/abstract=2866609

Dennis Y. Chung (Contact Author)

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Karel Hrazdil

Simon Fraser University ( email )

Faculty of Business Administration
8888 University Drive, Simon Fraser University
Burnaby, British Colombia V5A 1S6
Canada
778-782-6790 (Phone)
778-782-4920 (Fax)

HOME PAGE: http://www.sfubusiness.ca

Kim Trottier

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://business.sfu.ca/profiles/KimTrottier

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