Overpricing: Evidence from Earnings Announcements

46 Pages Posted: 4 Aug 2006

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Date Written: September 2006

Abstract

In the days before earnings announcements we find an average price increase of almost 1 percent for stocks that are likely to be overpriced already - stocks with low institutional ownership combined with high market-to-book ratios, turnover, volatility, or analyst forecast dispersion. However, in the days after earnings announcements these same stocks generate negative abnormal returns of more than 3 percent. Together, these results indicate a significant net correction following earnings announcements for stocks that are prone to be overpriced. These results are consistent with the optimism bias hypothesized in Miller (1977), and with recent evidence that cross-sectional return predictability is concentrated among stocks with low institutional ownership.

Keywords: market efficiency, short-sale restrictions, overpricing, earnings announcements, institutional ownership

JEL Classification: D82, G14, G19, M41

Suggested Citation

Berkman, Henk and Koch, Paul D., Overpricing: Evidence from Earnings Announcements (September 2006). Available at SSRN: https://ssrn.com/abstract=921508 or http://dx.doi.org/10.2139/ssrn.921508

Henk Berkman (Contact Author)

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Paul D. Koch

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

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