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Overconfident Institutions and Their Self-Attribution Bias: Evidence from Earnings Announcements

Published online by Cambridge University Press:  16 June 2020

Hsin-I Chou Open the ORCID record for Hsin-I Chou [Opens in a new window] ,
Mingyi Li ,
Xiangkang Yin Open the ORCID record for Xiangkang Yin [Opens in a new window]  and
Jing Zhao Open the ORCID record for Jing Zhao [Opens in a new window]
Hsin-I Chou
Affiliation:
RMIT University School of Economics, Finance, and Marketingdaisy.chou@rmit.edu.au
Mingyi Li
Affiliation:
Griffith University Department of Accounting, Finance, and Economicsmingyi.li@griffith.edu.au
Xiangkang Yin
Affiliation:
Deakin University Department of Financexiang.yin@deakin.edu.au
Jing Zhao*
Affiliation:
La Trobe University Department of Economics, Finance, and Marketingj.zhao@latrobe.edu.au
*
j.zhao@latrobe.edu.au (corresponding author)
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Abstract

Institutional demand for a stock before its earnings announcement is negatively related to subsequent returns. The relation is not attributable to the price pressure of institutional demand and is stronger for stocks with higher information asymmetry and/or greater valuation difficulty. These findings support the notion that overconfident institutions misprice stocks. Following announcements, institutions’ behavior exhibits the outcome-dependent feature of self-attribution bias. Whether they become more overconfident and delay their mispricing correction depends on whether earnings news confirms their preannouncement trades. This behavioral bias also offers a new explanation for the well-known post-earnings-announcement drift.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 5 , August 2021 , pp. 1738 - 1770
Copyright
© The Author(S), 2020. Published By Cambridge University Press On Behalf Of The Michael G. Foster School Of Business, University Of Washington

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Footnotes

We thank Linquan Chen, Edward Podolski, Ian Tonks, Jiaguo (George) Wang, seminar participants at the University of Bath and Deakin University, and conference participants at the 2016 Conference on the Theories and Practices of Securities and Financial Markets and the 2017 European Financial Management Association Annual Meeting for their highly valued comments. We are particularly grateful to Hendrik Bessembinder (the editor), Roger Edelen and Paul Irvine (the referees), and Avanidhar Subrahmanyam, whose comments and suggestions have substantially improved the paper. This project is supported by Discovery Projects funding provided by the Australian Research Council (DP140100113).

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