Stockholders’ Unrealized Returns and the Market Reaction to Financial Disclosures

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Using both investor- and stock-level data, I examine the relation between stockholders’ unrealized returns since purchase and the market response to earnings announcements. I demonstrate that stockholders’ unrealized gain/loss position moderates their trading behavior in response to earnings announcements. I also find that this behavior generates a short-window return underreaction to earnings news. My results are generally consistent with predictions from prospect theory regarding the manner in which stockholders’ unrealized returns moderate their trading response to belief shocks. However, my results also suggest that an emotional component (i.e., regret-avoidance/pride-seeking) is necessary to explain the observed investor behavior.

Original languageEnglish (US)
JournalJournal of Finance
DOIs
StatePublished - Jan 1 2019

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Financial disclosure
Market reaction
Stockholders
Earnings announcements
Purchase
News
Prediction
Pride
Emotion
Avoidance
Investors
Underreaction
Trading behavior
Market response
Prospect theory
Investor behavior

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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title = "Stockholders’ Unrealized Returns and the Market Reaction to Financial Disclosures",
abstract = "Using both investor- and stock-level data, I examine the relation between stockholders’ unrealized returns since purchase and the market response to earnings announcements. I demonstrate that stockholders’ unrealized gain/loss position moderates their trading behavior in response to earnings announcements. I also find that this behavior generates a short-window return underreaction to earnings news. My results are generally consistent with predictions from prospect theory regarding the manner in which stockholders’ unrealized returns moderate their trading response to belief shocks. However, my results also suggest that an emotional component (i.e., regret-avoidance/pride-seeking) is necessary to explain the observed investor behavior.",
author = "Eric Weisbrod",
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