Publication Type

Journal Article

Publication Date

12-2013

Abstract

Motivated by investor disagreement and corporate disclosure literatures, we examinehow stock price shocks affect future stock returns. We find that both large short-termprice drops and hikes are followed by negative abnormal returns over the subsequent year,consistent with the conjecture that price shocks are useful indicators of inter-temporalspikes in investor disagreement and investor opinion converges gradually. The asymmetricdrifts, return continuation for negative price shocks versus return reversal for positive ones,are in sharp contrast to the general findings of symmetric drifts in corporate event studies.Moreover, price shocks associated with public news events are followed by significantlyweaker downward drifts, suggesting that news disclosures mitigate disagreement-inducedoverpricing. Examining the dynamics of a disagreement proxy during and after price shocks,we provide further evidence for the disagreement hypothesis. The economic significance ofthe price shock effect is illustrated with a revised momentum strategy that generates anannualized abnormal return of 16.92 percent.

Keywords

Price shocks, disclosure, disagreement, drift, stock return

Discipline

Accounting

Research Areas

Corporate Reporting and Disclosure

Publication

Accounting Review

Volume

89

Issue

5

First Page

1

Last Page

50

ISSN

0001-4826

Identifier

10.2308/accr-50774

Publisher

American Accounting Association

Additional URL

https://doi.org/10.2308/accr-50774

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