Journal
MANAGEMENT SCIENCE
Volume 58, Issue 7, Pages 1305-1321Publisher
INFORMS
DOI: 10.1287/mnsc.1110.1485
Keywords
trends; streaks; gambler's fallacy; post-earnings-announcement drift
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The gambler's fallacy [Rabin, M. 2002. Inference by believers in the law of small numbers. Quart. J. Econom. 117(3) 775-816] predicts that trends bias investor expectations. Consistent with this prediction, we find that investors underreact to streaks of consecutive earnings surprises with the same sign. When the most recent earnings surprise extends a streak, post-earnings-announcement drift is strong and significant. In contrast, the drift is negligible following the termination of a streak. Indeed, streaks explain about half of the post-earnings-announcement drift in our sample. Our results are robust to more general definitions of trends than streaks and a battery of control variables including the magnitude of earnings surprises and their autocorrelation. Overall, post-earnings-announcement drift has a significant time-series component that is consistent with the gambler's fallacy.
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