Essays on stock market efficiency

Abstract

Fama(1998) describes the short-term return continuation reported by Jegadeesh and Titman (1993) and the post-earnings-announcement drift first documented by Ball and Brown (1968) as “above suspicion” anomalies. In this thesis, we study these challenges to the efficient market hypothesis and show that behavioral models can explain these phenomena. In addition, we investigate an event that might provide evidence of market inefficiency. Prior studies argue that overconfidence-driven overreaction leads to return predictability and high trading volume. Motivated by these studies, in the first chapter, we propose a measure of continuing overreaction using weighted signed volumes and examine whether it predicts returns. We find that the strategies of buying stocks with upward continuing overreaction and selling stocks with downward continuing overreaction generate significant positive returns and subsume the momentum profits. The results are stronger among stocks primarily held by investors more prone to biased self-attribution. An alternative measure of continuing overreaction constructed from volatility gives similar results. Our results provide direct support for the model of return predictability based on overconfidence and biased self-attribution. In the second chapter, we examine the stock market reaction to announcements of corporate name changes for firms belonging to Korean chaebols. We find that chaebol-affiliated firms changing their non-chaebol-name (a name not including the name of a chaebol) to a chaebol-name (a name including the name of a chaebol) experience a positive stock price reaction on the announcement date. Another noteworthy finding is that the firms also earn a statistically significant excess return on the effective date of a name change, as well as on the announcement date. The stock price reaction on the effective date is stronger among stocks experiencing a larger increase in their investor base, and this result provides support fo...