Price shocks, news disclosures, and asymmetric drifts

• Main Authors: LU, Hai, WANG, Kevin, WANG, Xiaolu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2013
• Subjects: Price shocks; disclosure; disagreement; drift; stock return; Accounting
• Online Access: https://ink.library.smu.edu.sg/soa_research/1605; https://ink.library.smu.edu.sg/context/soa_research/article/2632/viewcontent/SSRN_id1445095.pdf
• Institution: Singapore Management University

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.