Earnings Announcement Return Extrapolation
London Business School
Stephen A. Karolyi
Office of the Comptroller of the Currency
University of Notre Dame
ESSEC Business School
Wall Street Horizon Abstract
The findings of the study reveal that return extrapolation indeed exists in the context of earnings announcements. Investors tend to overreact to positive or negative earnings surprises, leading to subsequent reversals in stock returns. The authors observe that stocks with extreme positive or negative earnings surprises experience price corrections in the days following the announcement.
The paper also explores the implications of return extrapolation for market efficiency and investor behavior. It discusses how mispricing resulting from extrapolative behavior can create arbitrage opportunities for informed traders and impact overall market efficiency. (Note that the paper uses Wall Street Horizon corporate event data from 2006-2017.)
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