Investor (Mis)Reaction, Biased Beliefs, and the Mispricing Cycle

67 Pages Posted: 28 Nov 2021

See all articles by Azi Ben-Rephael

Azi Ben-Rephael

Rutgers Business School - Rutgers University

Steffen Hitzemann

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Yuanyuan Xiao

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: November 19, 2021

Abstract

We construct a new measure that captures the disparity between the market reaction to earnings information and the earnings surprise ("Return-Earnings Gap", "REG"). High REG scores positively predict analyst forecast errors and firm mispricing (overvaluation) scores, especially for build-up anomalies. Analyst forecast errors are slower to converge when REG provides confirming information. In turn, REG is positively predicted by analyst forecasts errors and higher mispricing, leading to a continuation of firm overvaluation over a few quarters. Overall, our results reveal how the market's (mis)reaction feeds back into the belief formation of analysts, which partially explains the slow correction of firm mispricing.

Keywords: Investor beliefs, analysts, mispricing, misreaction

JEL Classification: G00, G12, G14, G40, G41

Suggested Citation

Ben-Rephael, Azi and Hitzemann, Steffen and Xiao, Yuanyuan, Investor (Mis)Reaction, Biased Beliefs, and the Mispricing Cycle (November 19, 2021). Available at SSRN: https://ssrn.com/abstract=3966758 or http://dx.doi.org/10.2139/ssrn.3966758

Azi Ben-Rephael (Contact Author)

Rutgers Business School - Rutgers University ( email )

HOME PAGE: http://https://sites.google.com/site/abenreph

Steffen Hitzemann

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

Yuanyuan Xiao

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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