Hsin-I Chou, Mingyi Li, Xiangkang Yin, and Jing Zhao
Institutional demand for a stock prior to its earnings announcement is negatively related to subsequent returns. The relationship is not attributable to the price pressure of institutional demand and is stronger for stocks with higher information asymmetry and/or greater valuation difficulty. These findings support the notion of overconfident institutions mispricing stocks. Following announcements, institutions’ behavior exhibits the outcome-dependent feature of self-attribution bias. Whether they become more overly confident and delay their mispricing correction depends on whether earnings news confirms their pre-announcement trades or not. This behavioral bias also offers a new explanation for the well-known anomaly of post-earnings-announcement drift.