A Tough Act to Follow: Contrast Effects in Financial Markets

62 Pages Posted: 2 Oct 2017 Last revised: 7 Oct 2021

See all articles by Samuel M. Hartzmark

Samuel M. Hartzmark

University of Chicago - Booth School of Business

Kelly Shue

Yale School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2017

Abstract

A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday’s earnings surprise was bad and less impressive if yesterday’s surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by a key alternative explanation involving information transmission from previous earnings announcements.

Suggested Citation

Hartzmark, Samuel M. and Shue, Kelly, A Tough Act to Follow: Contrast Effects in Financial Markets (September 2017). NBER Working Paper No. w23883, Available at SSRN: https://ssrn.com/abstract=3046352

Samuel M. Hartzmark (Contact Author)

University of Chicago - Booth School of Business ( email )

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Kelly Shue

Yale School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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