Stockholders’ Unrealized Returns and the Market Reaction to Financial Disclosures

Stockholders’ Unrealized Returns and the Market Reaction to Financial Disclosures

  • ERIC WEISBROD

Article first published online: 13th December 2018 DOI: 10.1111/jofi.12743

Abstract


Using both investor‐ and stock‐level data, I examine the relation between stockholders’ unrealized returns since purchase and the market response to earnings announcements. I demonstrate that stockholders’ unrealized gain/loss position moderates their trading behavior in response to earnings announcements. I also find that this behavior generates a short‐window return underreaction to earnings news. My results are generally consistent with predictions from prospect theory regarding the manner in which stockholders’ unrealized returns moderate their trading response to belief shocks. However, my results also suggest that an emotional component (i.e., regret‐avoidance/pride‐seeking) is necessary to explain the observed investor behavior.

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