1 Conrad is from the Graduate School of Business, University of North Carolina, and Kaul is from the School of Business Administration, University of Michigan. We thank seminar participants at the Universities of Michigan, North Carolina, Oregon, Washington, and the Southern Methodist University, and · 2 Conrad is from the Graduate School of Business, University of North Carolina, and Kaul is from the School of Business Administration, University of Michigan. We thank seminar participants at the Universities of Michigan, North Carolina, Oregon, Washington, and the Southern Methodist University, and
Abstract
We show that the returns to the typical long-term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single-period (monthly) returns over long intervals. The cumulation process not only cumulates “true” returns but also the upward bias in single-period returns induced by measurement errors. We also show that the remaining “true” returns to loser or winner firms have no relation to overreaction. This study has important implications for event studies that use cumulative returns to assess the impact of information events.