Commenced in January 2007
Frequency: Monthly
Edition: International
Paper Count: 30676
Investors’ Misreaction to Subsequent Bad News

Authors: Chih-Hsiang Chang, Liang-Chien Lee, Ying-Shu Tseng


Comparing with prior studies mainly focused on the effect of a certain event (it may be the initial announcement of bad news or the repeated announcements of identical bad news) on stock price, the aim of this study is to explore how investors react to subsequent bad news with identical content. Empirical results show that as a result of behavioral pitfalls, investors underreact to the initial announcement of the bad news (i.e., unknown bad news) and overreact to the repeated announcements of the identical bad news (i.e., known bad news).

Keywords: Behavioral finance, subsequent bad news, behavioral pitfalls, Investors’ misreaction

Digital Object Identifier (DOI):

Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 1215


[1] H. Leland and D. Pyle, “Information asymmetries, financial structure, and financial intermediation,” Journal of Finance, vol. 32, pp. 371-387, 1977.
[2] A. Thakor, “An exploration of competitive signaling equilibria with third party information production: The case of debt insurance,” Journal of Finance, vol. 37, pp. 717-739, 1982.
[3] D. Kahneman and A. Tversky, “Prospect theory: An analysis of decision under risk,” Econometrica, vol. 47, pp. 263-291, 1979.
[4] F. Black, “Noise,” Journal of Finance, vol. 41, pp. 529-543, 1986.
[5] K. Daniel, D. Hirshleifer, and A. Subrahmanyam, “Investor psychology and security market under-and overreactions,” Journal of Finance, vol. 53, pp. 1839-1886, 1998.
[6] W. F. M. De Bondt, “A portrait of the individual investor,” European Economic Review, vol. 42, pp. 831-844, 1998.
[7] H. Shefrin, “Beyond greed and fear: Understanding behavioral finance and the psychology of investing (1st ed.),” Boston: Harvard Business School Press, 2000.
[8] A. M. Hibbert, R. T. Daigler, and B. Dupoyet, “A behavioral explanation for the negative asymmetric return-volatility relation,” Journal of Banking and Finance, vol. 32, pp. 2254-2266, 2008.
[9] C.-H. Chang, “IPO underpricing: A social comparison perspective,” International Review of Economics and Finance, vol. 20, pp. 367-375, 2011.
[10] C.-H. Chang and W.-S. Chiang, “Conditioning responses towards measures relating to the capital cost of short-sellers: Evidence from Taiwan,” Review of Pacific Basin Financial Markets and Policies, vol. 17, pp. 1450019-1~1450019-27, 2014.
[11] L. Liang, “Post-earnings announcements drift and market participants’ information processing biases,” Review of Accounting Studies, vol. 8, pp. 321-345, 2003.
[12] N. Barberis and R. Thaler, “A survey of behavioral finance,” in the Handbook of the economics of finance, edited by G. Constantinides, M. Harris, and R. Stultz, North-Holland, 2004.
[13] D. M. Cutler, J. M. Porterba, and L. M. Summers, “Speculative dynamics,” Review of Economic Studies, vol. 58, pp. 529-546, 1991.
[14] N. Barberis, A. Shleifer, and R. Vishny, “A model of investor sentiment,” Journal of Financial Economics, vol. 49, pp. 307-343, 1998.
[15] C.-H. Chang and K. C. Chan, “Investment banks’ stock ratings, call warrant issuance, and responses from heterogeneous investors: Evidence from Taiwan,” International Review of Economics & Finance, vol. 20, pp. 733-743, 2011.
[16] P. Liu, S. D. Smith, and A. A. Syed, “Stock price reactions to the Wall Street Journal’s securities recommendations,” Journal of Financial Quantitative Analysis, vol. 25, pp. 399-410, 1990.
[17] E. F. Fama and K. R. French, “The cross-section of expected stock returns,” Journal of Finance, vol. 47, pp. 427-465, 1992.
[18] S. J. Brown and J. B. Warner, “Using daily stock returns: The case of event studies,” Journal of Financial Economics, vol. 14, pp. 9-31, 1985.
[19] W. L. Megginson and K. A. Weiss, “Venture capitalist certification in initial public offerings,” Journal of Finance, vol. 46, pp. 879-903, 1991.
[20] J. W. Cooney, H. K. Kato, and J. S. Schallhein, “Underwriter certification and Japanese seasoned equity issues,” Review of Financial Studies, vol. 16, pp. 949-982, 2003.
[21] A. Sufi, “The real effects of debt certification: Evidence from the introduction of bank loan rating,” Review of Financial Studies, vol. 22, 1659-1691, 2009.
[22] O. Bosch and S. Steffen, “On syndicate composition, corporate structure and the certification effect of credit ratings,” Journal of Banking and Finance, vol. 35, pp. 290-299, 2011.