Information Uncertainty and Expected Returns

57 Pages Posted: 7 May 2004

See all articles by Guohua Jiang

Guohua Jiang

Peking University - Guanghua School of Management

Charles M.C. Lee

Stanford University - Graduate School of Business

Grace Yi Zhang

Barclays - Barclays Global Investors (BGI)

Date Written: May 5, 2004

Abstract

This study examines the role of information uncertainty (IU) in predicting cross-sectional stock returns. We define IU in terms of value ambiguity, or the precision with which firm value can be estimated by knowledgeable investors at reasonable cost. Using several different proxies for IU, we show that: (1) On average, High-IU firms earn lower future returns (the mean effect), and (2) Price and earnings momentum effects are much stronger among high-IU firms (the interaction effect). These findings are consistent with theoretical models that feature investor overconfidence (Daniel et al. (1998)) and informational cascades (Bikhchandani et al. (1992)). Specifically, our evidence indicates that high IU exacerbates investor overconfidence and limits rational arbitrage.

Keywords: Information uncertainty, overconfidence, arbitrage cost, stock returns

JEL Classification: G12, G14, M41

Suggested Citation

Jiang, Guohua and Lee, Charles M.C. and Zhang, Grace Yi, Information Uncertainty and Expected Returns (May 5, 2004). Available at SSRN: https://ssrn.com/abstract=533522 or http://dx.doi.org/10.2139/ssrn.533522

Guohua Jiang

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China
+8610 62757930 (Phone)
+8610 62751470 (Fax)

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Grace Yi Zhang

Barclays - Barclays Global Investors (BGI) ( email )

45 Fremont Street
San Francisco, CA 94105
United States

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