Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-15T10:27:44.817Z Has data issue: false hasContentIssue false
  • English
  • Français

Overconfident Institutions and Their Self-Attribution Bias: Evidence from Earnings Announcements

Published online by Cambridge University Press:  16 June 2020

Hsin-I Chou Open the ORCID record for Hsin-I Chou [Opens in a new window] ,
Mingyi Li ,
Xiangkang Yin Open the ORCID record for Xiangkang Yin [Opens in a new window]  and
Jing Zhao Open the ORCID record for Jing Zhao [Opens in a new window]
Hsin-I Chou
Affiliation:
RMIT University School of Economics, Finance, and Marketingdaisy.chou@rmit.edu.au
Mingyi Li
Affiliation:
Griffith University Department of Accounting, Finance, and Economicsmingyi.li@griffith.edu.au
Xiangkang Yin
Affiliation:
Deakin University Department of Financexiang.yin@deakin.edu.au
Jing Zhao*
Affiliation:
La Trobe University Department of Economics, Finance, and Marketingj.zhao@latrobe.edu.au
*
j.zhao@latrobe.edu.au (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

Institutional demand for a stock before its earnings announcement is negatively related to subsequent returns. The relation is not attributable to the price pressure of institutional demand and is stronger for stocks with higher information asymmetry and/or greater valuation difficulty. These findings support the notion that overconfident institutions misprice stocks. Following announcements, institutions’ behavior exhibits the outcome-dependent feature of self-attribution bias. Whether they become more overconfident and delay their mispricing correction depends on whether earnings news confirms their preannouncement trades. This behavioral bias also offers a new explanation for the well-known post-earnings-announcement drift.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 5 , August 2021 , pp. 1738 - 1770
Copyright
© The Author(S), 2020. Published By Cambridge University Press On Behalf Of The Michael G. Foster School Of Business, University Of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Linquan Chen, Edward Podolski, Ian Tonks, Jiaguo (George) Wang, seminar participants at the University of Bath and Deakin University, and conference participants at the 2016 Conference on the Theories and Practices of Securities and Financial Markets and the 2017 European Financial Management Association Annual Meeting for their highly valued comments. We are particularly grateful to Hendrik Bessembinder (the editor), Roger Edelen and Paul Irvine (the referees), and Avanidhar Subrahmanyam, whose comments and suggestions have substantially improved the paper. This project is supported by Discovery Projects funding provided by the Australian Research Council (DP140100113).

References

Aboody, D., and Lev, B.. “Information Asymmetry, R&D, and Insider Gains.” Journal of Finance, 55 (2000), 2747–2766.CrossRefGoogle Scholar
Akbas, F. “The Calm before the Storm.” Journal of Finance, 71 (2016), 225–266.CrossRefGoogle Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Anand, A.; Irvine, P.; Puckett, A.; and Venkataraman, K.. “Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs.” Review of Financial Studies, 25 (2012), 557–598.CrossRefGoogle Scholar
Baker, M.; Litov, L.; Wachter, J. A.; and Wurgler, J.. “Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements.” Journal of Financial and Quantitative Analysis, 45 (2010), 1111–1131.CrossRefGoogle Scholar
Ball, R., and Brown, P.. “An Empirical Evaluation of Accounting Income Numbers.” Journal of Accounting Research, 6 (1968), 159–178.CrossRefGoogle Scholar
Banerjee, S. “Learning from Prices and the Dispersion in Beliefs.” Review of Financial Studies, 23 (2011), 3025–3068.CrossRefGoogle Scholar
Bernard, V. L., and Thomas, J. K.. “Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?” Journal of Accounting Research, 27 (1989), 1–36.CrossRefGoogle Scholar
Bernard, V. L.; Thomas, J.; and Wahlen, J.. “Accounting-Based Stock Price Anomalies: Separating Market Inefficiencies from Risk.” Contemporary Accounting Research, 14 (1997), 89–136.CrossRefGoogle Scholar
Bhattacharya, N.; Desai, H.; and Venkataraman, K.. “Does Earnings Quality Affect Information Asymmetry? Evidence from Trading Costs.” Review of Financial Studies, 23 (2013), 3025–3068.Google Scholar
Brown, N. C.; Wei, K. D.; and Wermers, R.. “Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices.” Management Science, 60 (2014), 1–20.CrossRefGoogle Scholar
Brown, S., and Hillegeist, S. A.. “How Disclosure Quality Affects the Level of Information Asymmetry.” Review of Accounting Studies, 12 (2007), 443–477.CrossRefGoogle Scholar
Brown, S.; Hillegeist, S. A.; and Lo, K.. “The Effect of Earnings Surprises on Information Asymmetry.” Journal of Accounting and Economics, 47 (2009), 208–225.CrossRefGoogle Scholar
Busse, J. A.; Green, T. C.; and Jegadeesh, N.. “Buy-Side Trades and Sell-Side Recommendations: Interactions and Information Content.” Journal of Financial Markets, 15 (2012), 207–232.CrossRefGoogle Scholar
Chan, L. K. C., and Lakonishok, J.. “Institutional Equity Trading Costs: NYSE versus Nasdaq.” Journal of Finance, 52 (1997), 713–735.CrossRefGoogle Scholar
Daniel, K., and Hirshleifer, D.. “Overconfident Investors, Predictable Returns, and Excessive Trading.” Journal of Economic Perspectives, 29 (2015), 61–87.CrossRefGoogle Scholar
Daniel, K.; Hirshleifer, D.; and Subrahmanyam, A.. “Investor Psychology and Security Market Under‐ and Overreactions.” Journal of Finance, 53 (1998), 1839–1885.CrossRefGoogle Scholar
Dasgupta, A.; Prat, A.; and Verardo, M.. “Institutional Trade Persistence and Long-Term Equity Returns.” Journal of Finance, 66 (2011), 635–653.CrossRefGoogle Scholar
Easley, D.; Kiefer, N. K.; and O’Hara, M.. “One Day in the Life of a Very Common Stock.” Review of Financial Studies, 10 (1997), 805–835.CrossRefGoogle Scholar
Edelen, R. M.; Ince, O. S.; and Kadlec, G. B.. “Institutional Investors and Stock Return Anomalies.” Journal of Financial Economics, 119 (2016), 472–488.CrossRefGoogle Scholar
Edelen, R. M., and Warner, J. B.. “Aggregate Price Effects of Institutional Trading: A Study of Mutual Fund Flow and Market Returns.” Journal of Financial Economics, 59 (2001), 195–220.CrossRefGoogle Scholar
Einhorn, H. J. “Overconfidence in Judgement.” New Directions for Methodology of Social and Behavioral Science, 4 (1980), 1–16.Google Scholar
Fama, E. F. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283–306.CrossRefGoogle Scholar
Fernandes, N., and Ferreira, M. A.. “Does International Cross-Listing Improve the Information Environment.” Journal of Financial Economics, 88 (2008), 216–244.CrossRefGoogle Scholar
Ferreira, M. A., and Laux, P. A.. “Corporate Governance, Idiosyncratic Risk, and Information Flow.” Journal of Finance, 62 (2007), 951–989.CrossRefGoogle Scholar
Gervais, S., and Odean, T.. “Learning to Be Overconfident.” Review of Financial Studies, 14 (2001), 1–17.CrossRefGoogle Scholar
Griffin, D., and Tversky, A.. “The Weighing of Evidence and the Determinants of Confidence.” Cognitive Psychology, 24 (1992), 411–435.CrossRefGoogle Scholar
Griffin, J. M.; Shu, T.; and Topaloglu, S.. “Examining the Dark Side of Financial Markets: Do Institutions Trade on Information from Investment Bank Connections?” Review of Financial Studies, 25 (2012), 2155–2188.CrossRefGoogle Scholar
Hirshleifer, D.; Myers, J. N.; Myers, L.; and Teoh, S. H.. “Do Individual Investors Cause Post-Earnings Announcement Drift? Direct Evidence from Personal Trades.” The Accounting Review, 83 (2008), 1521–1550.CrossRefGoogle Scholar
Jegadeesh, N. “Evidence of Predictable Behavior of Security Returns.” Journal of Finance, 45 (1990), 881–898.CrossRefGoogle Scholar
Jiang, H., and Sun, Z.. “Dispersion in Beliefs among Active Mutual Funds and the Cross-Section of Stock Returns.” Journal of Financial Economics, 114 (2014), 341–365.CrossRefGoogle Scholar
Kaniel, R.; Liu, S.; Saar, G.; and Titman, S.. “Individual Investor Trading and Return Patterns around Earnings Announcements.” Journal of Finance, 67 (2012), 639–680.CrossRefGoogle Scholar
Ke, B., and Ramalingegowda, S.. “Do Institutional Investors Exploit the Post-Earnings Announcement Drift?” Journal of Accounting and Economics, 39 (2005), 25–53.CrossRefGoogle Scholar
Keim, D. B., and Madhavan, A.. “Anatomy of the Trading Process: Empirical Evidence on the Behavior of Institutional Traders.” Journal of Financial Economics, 37 (1995), 371–398.CrossRefGoogle Scholar
Keren, G. “On the Calibration of Probability Judgements: Some Critical Comments and Alternative Perspectives.” Journal of Behavioral Decision Making, 10 (1997), 269–278.3.0.CO;2-L>CrossRefGoogle Scholar
Koehler, D. J.; Brenner, L.; and Griffin, D.. “The Calibration of Expert Judgment: Heuristics and Biases beyond the Laboratory.” In Heuristics and Biases: The Psychology of Intuitive Judgement, Gilovich, T., Griffin, D., and Kahneman, D., eds. New York: Cambridge University Press (2002), 686–715.CrossRefGoogle Scholar
Kumar, A. “Hard-to-Value Stocks, Behavioral Biases, and Informed Trading.” Journal of Financial and Quantitative Analysis, 44 (2009), 1375–1401.CrossRefGoogle Scholar
Langer, E. J., and Roth, J.. “Heads I Win Tails It’s Chance: The Illusion of Control as a Function of the Sequence of Outcomes in a Purely Chance Tasks.” Journal of Personality and Social Psychology, 32 (1975), 951–955.CrossRefGoogle Scholar
Milian, J. A. “Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?” Journal of Accounting Research, 53 (2015), 175–220.CrossRefGoogle Scholar
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “How Do Diversity of Opinion and Information Asymmetry Affect Acquirer Returns?” Review of Financial Studies, 20 (2007), 2047–2078.CrossRefGoogle Scholar
Pástor, L., and Pietro, V.. “Stock Valuation and Learning about Profitability.” Journal of Finance, 58 (2003), 1749–1789.CrossRefGoogle Scholar
Petersen, M. A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.CrossRefGoogle Scholar
Puckett, A., and Yan, X.. “The Interim Trading Skills of Institutional Investors.” Journal of Finance, 66 (2011), 601–633.CrossRefGoogle Scholar
Savor, P., and Wilson, M.. “Earnings Announcements and Systematic Risk.” Journal of Finance 71 (2016), 83–138.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “The Limits of Arbitrage.” Journal of Finance, 52 (1997), 35–55.CrossRefGoogle Scholar
So, E., and Wang, S.. “News-Driven Return Reversals: Liquidity Provision Ahead of Earnings Announcement.” Journal of Financial Economics, 114 (2014), 20–35.CrossRefGoogle Scholar
Statman, M.; Thorley, S.; and Vorkink, K.. “Investor Overconfidence and Trading Volume.” Review of Financial Studies, 19 (2006), 1531–1565.CrossRefGoogle Scholar
Taylor, S. E., and Brown, J. D.. “Illusion and Well-Being: A Social Psychological Perspective on Mental Health.” Psychological Bulletin, 103 (1988), 193–210.CrossRefGoogle ScholarPubMed
Venter, J. H., and de Jongh, D. C. J.. “Extending the EKOP Model to Estimate the Probability of Informed Trading.” Studies in Economics and Econometrics, 30 (2006), 25–39.CrossRefGoogle Scholar
Warther, V. A. “Aggregate Mutual Fund Flows and Security Returns.” Journal of Financial Economics, 39 (1995), 209–235.CrossRefGoogle Scholar
Supplementary material: PDF

Chou et al. supplementary material

Chou et al. supplementary material 1
Download Chou et al. supplementary material(PDF)
PDF 820.7 KB
Supplementary material: File

Chou et al. supplementary material

Chou et al. supplementary material 2

Download Chou et al. supplementary material(File)
File 14.8 KB