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The Reversal of Large Stock-Price Decreases

Authors

  • MARC BREMER,

  • RICHARD J. SWEENEY

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    • Bremer is associated with Northeastern and Nanzan Universities, Sweeney with the School of Business Administration of Georgetown University. Earlier versions of this paper were presented at the 1988 meeting of the Western Finance Association and at the Claremont/University of Southern California Workshop in Financial and Monetary Economics. We benefited from the comments of the participants. Thanks are also due to Swaminathan Badrinath, Paul Bolster, Douglas Joines, Arthur Havenner, Charles Higgins, Peter Kretzmer, David Mayers, Jay Prag, Aris Protopapadakis, Ed Saunders, David Smith, Venkat Srinivasan, Jon Welch, Thomas Willett, Eriko Yamamoto, and an anonymous referee.

ABSTRACT

Extremely large negative 10-day rates of return are followed on average by larger-than-expected positive rates of return over following days. This price adjustment lasts approximately 2 days and is observed in a sample of firms that is largely devoid of methodological problems that might explain the reversal phenomenon. While perhaps not representing abnormal profit opportunities, these reversals present a puzzle as to the length of the price adjustment period. Such a slow recovery is inconsistent with the notion that market prices quickly reflect relevant information.

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