Essays on investor behavior and stock market anomalies

Abstract

The dissertation consists of three essays on investor behavior and stock market anomalies. The first essay studies the relationship between post-earnings-announcement drift (PEAD) and the 52-week high. PEAD is frequently discovered in numerous countries including Korea. We attempt to explain PEAD in the Korean market using anchoring bias. Investors interpret impact of earnings news based on a stock’s nearness to 52-week high, and hence underreact to positive earnings news if the stock price is near its peak. We find that among positive earnings stocks, PEAD is pronounced when they are near 52-week highs. Furthermore, individual investors’ buying pressure around earnings announcement is concentrated on stocks far from 52-week highs.

The second essay examines the role of psychological barriers in lottery-related anomalies. Previous studies find that stocks with lottery features are overpriced. We show that anomalies induced by investors’ lottery preferences exist primarily among stocks that are far from their 52-week high prices. The results suggest that if stocks are near their 52-week highs, investors no longer prefer lottery stocks since they consider the 52-week high a psychological barrier or an upper bound for prices.

The third essay investigates the relationship between the market states and the MAX effect. Prior studies find that stocks with high maximum daily returns over the previous month (MAX) have low expected returns. We show that this effect varies with market states, and specifically, vanishes following bear markets, because the extreme positive returns of high MAX stocks, which can be predicted by jackpot probability, are concentrated following bear markets. However, investors react to MAX and not jackpot probability. Thus, high MAX stocks exhibit higher returns following bear markets compared to bull markets, and the MAX effect disappears following bear markets.