Result is more consistent with the irrational expectations

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LaPorta, Lakonishok, Shleifer, and Vishny (“Good News for Value Stocks,” Journal of Finance, June 1997) study the returns on stocks on the few days surrounding their quarterly earnings announcements (relative to various expected return benchmarks). They find that on average, high-B/M stocks earn 0.9% around an earnings announcement. In contrast, low-B/M stocks earn an average of -0.1% around an earnings announcement. The difference is statistically significant. Discuss whether this result is more consistent with the irrational expectations (behavioral) view, or the risk factor (efficient markets) view of the book-tomarket effect, and explain your logic.

Reference no: EM131057032

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