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Investor Reaction to Corporate Event Announcements: Under-reaction or Over-reaction?

Posted: 30 Jun 2002  

Padmaja Kadiyala

Pace University - Lubin School of Business

P. Raghavendra Rau

University of Cambridge

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Abstract

Two conflicting behavioral models, under-reaction and over-reaction, have been proposed as explanations for the long-run abnormal return patterns following a variety of corporate events. We test hypotheses that distinguish between these two behavioral models for four corporate events, seasoned equity offerings, share repurchases, stock-financed acquisitions and cash-financed acquisitions. The evidence is consistent with the hypothesis that long-run abnormal returns are attributable to the investor under-reaction model. Investors under-react to short-term information available prior to the event and subsequently under-react to information conveyed by the corporate event. Long-run abnormal returns reflect the net effect of investor under-reaction to these two pieces of information. We find no evidence to support the over-reaction model. We also find no evidence to support a more complicated behavioral model that postulates investor under-reaction to short-term information and over-reaction to long-term trends.

Notes: Previously titled "It's All Under-Reaction"

Keywords: Anomalies, over-reaction, under-reaction, behavioral finance, long-horizon stock performance

JEL Classification: G14, G34

Suggested Citation

Kadiyala, Padmaja and Rau, P. Raghavendra, Investor Reaction to Corporate Event Announcements: Under-reaction or Over-reaction?. Journal of Business, Vol. 77, pp. 357-386, 2004. Available at SSRN: https://ssrn.com/abstract=312670 or http://dx.doi.org/10.2139/ssrn.312670

Padmaja Kadiyala

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
914-773-3620 (Phone)

P. Raghavendra Rau (Contact Author)

University of Cambridge ( email )

Cambridge Judge Business School
Trumpington Street
Cambridge, Cambridgeshire CB21AG
United Kingdom
3103626793 (Phone)

HOME PAGE: http://www.raghurau.com/

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