Journal of Finance Vol. 53 No. 6 1998
Investor Psychology and Security Market Under- and Overreactions
Abstract
We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations (“momentum”), short-run earnings “drift,” but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy.
- DOI
- https://doi-org.proxy.lib.uiowa.edu/10.1111/0022-1082.00077
- Volume
- 53
- Issue
- 6
- Pages
- 1839-1885
- Sources
- bibtex:phds-export.bib