Investor Overreaction, Cross-Sectional Dispersion of Firm Valuations, and Expected Stock Returns

67 Pages Posted: 14 Mar 2006 Last revised: 29 May 2014

See all articles by Danling Jiang

Danling Jiang

College of Business, Stony Brook University

Abstract

This paper develops the theoretical predictions that when investor overreaction to market-wide information is larger, firm valuations in the cross-section become more dispersed, and stocks on average earn lower expected returns. Consistent with the model prediction, I find that my measure of firm valuation dispersion measure is a negative predictor of subsequent aggregate returns. The dispersion-return relation is most pronounced among firms that have highly subjective valuations and significant limits of arbitrage.

Keywords: Overreaction, overconfidence, aggregate, cross-section, arbitrage

JEL Classification: G12, G14

Suggested Citation

Jiang, Danling, Investor Overreaction, Cross-Sectional Dispersion of Firm Valuations, and Expected Stock Returns. Available at SSRN: https://ssrn.com/abstract=890397 or http://dx.doi.org/10.2139/ssrn.890397

Danling Jiang (Contact Author)

College of Business, Stony Brook University ( email )

306 Harriman Hall
Stony Brook, NY 11794
United States

HOME PAGE: http://sites.google.com/site/danlingjiang

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