Information Uncertainty and Stock Returns



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    • X. Frank Zhang is from Yale University. I am grateful to Anwer Ahmed, Ray Ball, Daniel Bens, Philip Berger, Kent Daniel, Rachel Hayes, Charles Lee, Richard Leftwich, Joseph Piotroski, Robert Stambaugh (the editor), Richard Thaler, Franco Wong, and participants at the University of Chicago Asset Pricing Lunch session for many helpful comments, and especially Robert Bushman, Stephanie Curcuru, and Abbie Smith for extensive discussion and editorial assistance. Special thanks also go to an anonymous referee for many constructive suggestions. Chris Malloy provided me with the unadjusted individual forecast data under permission from I/B/E/S. Any remaining errors or ambiguities are solely my responsibility.


There is substantial evidence of short-term stock price continuation, which the prior literature often attributes to investor behavioral biases such as underreaction to new information. This paper investigates the role of information uncertainty in price continuation anomalies and cross-sectional variations in stock returns. If short-term price continuation is due to investor behavioral biases, we should observe greater price drift when there is greater information uncertainty. As a result, greater information uncertainty should produce relatively higher expected returns following good news and relatively lower expected returns following bad news. My evidence supports this hypothesis.