Returns to contrarian investment strategies: Tests of naive expectations hypotheses

Returns to contrarian investment strategies: Tests of naive expectations hypotheses This paper examines the ability of naive investor expectations models to explain the higher returns to contrarian investment strategies. Contrary to Lakonishok, Shleifer, and Vishny (1994), we find no systematic evidence that stock prices reflect naive extrapolation of past trends in earnings and sales growth. Building on Bauman and Dowen (1988) and La Porta (1995), however, we find that stock prices appear to naively reflect analysts' biased forecasts of future earnings growth. Further, we find that naive reliance on analysts' forecasts of future earnings growth can explain over half of the higher returns to contrarian investment strategies. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Returns to contrarian investment strategies: Tests of naive expectations hypotheses

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Publisher
Elsevier
Copyright
Copyright © 1997 Elsevier Ltd
ISSN
0304-405x
D.O.I.
10.1016/S0304-405X(96)00887-2
Publisher site
See Article on Publisher Site

Abstract

This paper examines the ability of naive investor expectations models to explain the higher returns to contrarian investment strategies. Contrary to Lakonishok, Shleifer, and Vishny (1994), we find no systematic evidence that stock prices reflect naive extrapolation of past trends in earnings and sales growth. Building on Bauman and Dowen (1988) and La Porta (1995), however, we find that stock prices appear to naively reflect analysts' biased forecasts of future earnings growth. Further, we find that naive reliance on analysts' forecasts of future earnings growth can explain over half of the higher returns to contrarian investment strategies.

Journal

Journal of Financial EconomicsElsevier

Published: Jan 1, 1997

References

  • Another look at the cross-section of expected returns
    Kothari, S.P.; Shanken, Jay; Sloan, Richard G.
  • Underwriting relationships and analysts' earnings forecasts
    Lin, Hsiou-wei; McNichols, Maureen
  • Multifactor models do not explain deviations from the CAPM
    MacKinlay, A.Craig

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