Disposition Effect and Delayed Stock Price Reactions to Earnings News
Summary
The document links prospect theory and mental accounting to the disposition effect: investors may treat gains and losses differently, which can slow how prices incorporate new information. It proposes that post announcement price drift lasts longer when the direction of the price adjustment aligns with investors’ unrealized gains. The empirical discussion applies this idea to China’s CSI 800 stocks, combining standardized unexpected earnings (SUE) with a measure of unrealized gains, CGO or RCGO.
It compares portfolios that pair high or low earnings surprises with high or low unrealized gains. The reported results favor the combination of positive earnings surprises and high RCGO for continued upward drift. The effect is less evident among stocks with earnings far below expectations, and a three factor regression is said to attribute part of the comparison to prior relative overvaluation in a different group. The excerpt does not provide full sample, transaction cost, or statistical significance details, limiting assessment of robustness and implementability.
Key ideas
- Prospect theory and mental accounting help explain why investors respond differently to gains and losses.
- The disposition effect may delay price adjustment after new information arrives.
- The study tests earnings surprises alongside measures of investors’ unrealized gains in CSI 800 stocks.
- Positive earnings surprises paired with high RCGO are reported to show more persistent upward drift.
- The effect is not equally apparent across earnings surprise groups, and the excerpt lacks full methodological detail.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.