Does Information Acquisition Alleviate Market Anomalies? Categorization Bias in Stock Splits

Review of Finance, Forthcoming

53 Pages Posted: 3 May 2017

See all articles by Dongmin Kong

Dongmin Kong

School of Finance, Zhongnan University of Economics and Law; Department of Finance, Huazhong University of Science and Technology

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Shasha Liu

School of Management, Jinan University

Date Written: February 5, 2017

Abstract

Using a unique proprietary account-level trading dataset in China, we investigate how active information acquisition alleviates price-based return comovement, a typical anomaly in stock splits. We find that: 1) individual trading drives the comovement and the trading correlation between split stocks and the low-price portfolio increases significantly after splits; 2) individuals can learn the firm fundamentals through information acquisition, which effectively alleviates their categorized bias; and 3) the role of information acquisition is more significant in environments characterized by greater uncertainty. Our results are robust to different specifications and alternative measures. Taken together, this paper emphasizes the important role of information acquisition in alleviating behavioral bias and improving decision-making.

Keywords: Information acquisition; Comovement; Investor trading behavior; Stock splits.

JEL Classification: G02, G11, G14

Suggested Citation

Kong, Dongmin and Lin, Chen and Liu, Shasha, Does Information Acquisition Alleviate Market Anomalies? Categorization Bias in Stock Splits (February 5, 2017). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2962507

Dongmin Kong (Contact Author)

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Shasha Liu

School of Management, Jinan University ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

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