Investor Reaction to
Corporate Event Announcements: Under-reaction or Over-reaction?
Padma Kadiyala and P. Raghavendra Rau
Krannert School of Management, Purdue University
Two conflicting behavioral models, under-reaction and
over-reaction, have been proposed as explanations for
the long-run abnormal return patterns following a variety
of corporate events. We develop a methodology that allows
us to explicitly distinguish between these two models
and apply it to four corporate events, seasoned equity
offerings, share repurchases, stock-financed acquisitions
and cash-financed acquisitions. Our evidence shows that
long-run abnormal returns can be attributed only to the
investor under-reaction model. Investors under-react
to short-term information available prior to the event
and subsequently to the information conveyed by the corporate
event. Long-run abnormal returns reflect the net effect
of investor under-reaction to these two pieces of information.
We find no evidence to support the over-reaction model
of investor behavior. We also find no evidence to support
a more complicated behavioral model where investors under-react
to short-term information and over-react to long-term
trends.
Journal of Economic Literature Classification Codes:
G14, G34
This paper is forthcoming in the Journal
of Business.
This paper has been presented at
and at the
- Chicago
Quantitative Alliance Meetings, Las Vegas, April
2002
- Financial Management
Association European Meetings, Paris, May 2001
- American Finance
Association Meetings, New Orleans, January 2001
- European
Financial Management Association Meetings, Athens,
June 2000
- European
Finance Association Meetings, Helsinki, 1999
- Washington Area Finance Conference, Fairfax, April
1999
It has won the Chicago Quantitative Alliance Award,
in the Spring 2002 meetings at Las Vegas.
It has been referenced in
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