Evidence on the Presence of Representativeness Bias in Investor Interpretation of Consistency in Sales Growth Academic Article uri icon

abstract

  • © 2017 INFORMS. We document that consistent patterns of high or low sales growth that are incongruent with underlying fundamentals are followed by significant stock price reversals. In contrast, no stock return reversals are found for firms that achieve the same level of sales growth in an inconsistent manner. Furthermore, future earnings announcement returns mimic the pattern of abnormal stock returns documented for the Consistent-and Inconsistent-Growth portfolios, respectively, corroborating our main findings. Our results are robust to controls for the magnitude of sales growth, fundamental strength, business cycle risk exposures, and standard risk factors. Our evidence is consistent with representativeness bias affecting investor interpretation of consistency in sales growth patterns.

altmetric score

  • 0.75

author list (cited authors)

  • Ahmed, A. S., & Safdar, I.

citation count

  • 1

publication date

  • January 2017