Publication Type

Journal Article

Version

Publisher’s Version

Publication Date

7-2012

Abstract

The gambler's fallacy (Rabin, 2002) predicts that trends bias investor expectations. Consistent with this prediction, we find that investors underreact to streaks of consecutive earnings surprises with the same sign. When the most recent earnings surprise extends a streak, post-earnings announcement drift is strong and significant. In contrast, the drift is negligible following thetermination of a streak. Indeed, streaks explain about half of the post-earnings announcement drift in our sample. Our results are robust to more general definitions of trends than streaks and a battery of control variables including the magnitude ofearnings surprises and their autocorrelation. Overall, post-earnings announcement drift has a significant time-series component that is consistent with the gambler's fallacy.

Keywords

Trends, Streaks, Gambler's Fallacy, Post-Earnings Announcement Drift

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Management Science

Volume

58

Issue

7

First Page

1305

Last Page

1321

ISSN

0025-1909

Identifier

10.1287/mnsc.1110.1485

Publisher

INFORMS

Additional URL

http://dx.doi.org/10.1287/mnsc.1110.1485

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