We thank Kenneth French for providing the Fama-French monthly time series of factor realisations. Rick Mendenhall, Maureen O’Hara, Jay Ritter, Paul Schultz, Paula Tkac, Michael Roberts and seminar participants at the University of Notre Dame and the 2004 FMA meeting provided helpful comments.
Divergence of Opinion Surrounding Extreme Events
Version of Record online: 8 NOV 2005
European Financial Management
Volume 11, Issue 5, pages 579–601, November 2005
How to Cite
Loughran, T. and Marietta-Westberg, J. (2005), Divergence of Opinion Surrounding Extreme Events. European Financial Management, 11: 579–601. doi: 10.1111/j.1354-7798.2005.00299.x
- Issue online: 8 NOV 2005
- Version of Record online: 8 NOV 2005
- divergence of opinion
This paper examines the stock market performance of a large sample of new issues (IPOs and SEOs) following an extreme price movement during the first three years after the offering. Strong underperformance follows either a positive or negative (at least +/−15%) one-day return event. This poor performance cannot be explained by the Fama-French four-factor methodology, or by the generally low stock returns of growth firms. Unlike recent issuers, non-issuers report no poor performance following a similar extreme event using the four-factor methodology. The extreme event date shows very high levels of turnover, a measure of divergence of opinion. Finally, there is a strong negative linkage between higher levels of divergence of opinion and subsequent stock performance.