A direct test of the cognitive bias theory of share price reversals
Generate an AI Snapshot to get a quick, structured summary of this paper.
A concise AI-generated summary of the paper will appear here once you click Generate AI Snapshot.
Abstract
The cognitive bias theory of share price reversals predicts that the market forms overly optimistic (pessimistic) earnings expectations for firms that experienced high (low) stock returns. This paper finds evidence inconsistent with this theory. Analysts do not underpredict earnings following large stock price declines; instead, they remain overly optimistic about future earnings. Similarly, analysts do not overpredict earnings for firms after periods of extreme price rises. It appears, then, that other factors are responsible for the observed mean reversions in share prices.