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Long-Term Market Overreaction: The Effect of Low-Priced Stocks

Authors

  • TIM LOUGHRAN,

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    • Loughran is from the University of Iowa. Ritter is from the University of Florida. We would like to thank Jennifer Conrad, David Ikenberry, Gautam Kaul, Josef Lakonishok, Inmoo Lee, David Mayers, Marc Reinganum, René Stulz, Richard Thaler, an anonymous referee, seminar participants at Cornell and Iowa, and especially Louis Chan and Narisimhan Jegadeesh for helpful comments. In addition, we would like to thank Jennifer Conrad and Gautam Kaul for graciously making all of their data available for our inspection.

  • JAY R. RITTER

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    • Loughran is from the University of Iowa. Ritter is from the University of Florida. We would like to thank Jennifer Conrad, David Ikenberry, Gautam Kaul, Josef Lakonishok, Inmoo Lee, David Mayers, Marc Reinganum, René Stulz, Richard Thaler, an anonymous referee, seminar participants at Cornell and Iowa, and especially Louis Chan and Narisimhan Jegadeesh for helpful comments. In addition, we would like to thank Jennifer Conrad and Gautam Kaul for graciously making all of their data available for our inspection.


ABSTRACT

Conrad and Kaul (1993) report that most of De Bondt and Thaler's (1985) long-term overreaction findings can be attributed to a combination of bid-ask effects when monthly cumulative average returns (CARs) are used, and price, rather than prior returns. In direct tests, we find little difference in test-period returns whether CARs or buy-and-hold returns are used, and that price has little predictive ability in cross-sectional regressions. The difference in findings between this study and Conrad and Kaul's is primarily due to their statistical methodology. They confound cross-sectional patterns and aggregate time-series mean reversion, and introduce a survivor bias. Their procedures increase the influence of price at the expense of prior returns.

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