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Does the Stock Market Overreact to Corporate Earnings Information?



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    • Leonard N. Stern Graduate School of Business, New York University. I want to thank Ray Ball, Victor Bernard, John Bildersee, Stephen Brown, Colin Camerer, Martin Gruber, Cole Kendall, Gary King, April Klein, S. P. Kothari, Josef Lakonishok, Joshua Livnat, Mike Long, Wayne Mikkelson, Paul Schultz, Keith Weigelt, an anonymous reviewer, and the co-editor, David Mayers, for their helpful comments. The financial support of the Peat Marwick Foundation is gratefully acknowledged. All errors remain my responsibility.


This paper tests whether the stock market overreacts to extreme earnings, by examining firms' stock returns over the 36 months subsequent to extreme earnings years. While the poorest earners do outperform the best earners, the poorest earners are also significantly smaller than the best earners. When poor earners are matched with good earners of equal size, there is little evidence of differential performance. This suggests that size, and not investor overreaction to earnings, is responsible for the “overreaction” phenomenon, the tendency for prior period losers to outperform prior period winners in the subsequent period.

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