NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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A Tough Act to Follow: Contrast Effects In Financial Markets

Samuel M. Hartzmark, Kelly Shue

NBER Working Paper No. 23883
Issued in September 2017
NBER Program(s):Asset Pricing Program, Corporate Finance Program

A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday’s earnings surprise was bad and less impressive if yesterday’s surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by a key alternative explanation involving information transmission from previous earnings announcements.

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Document Object Identifier (DOI): 10.3386/w23883

Published: SAMUEL M. HARTZMARK & KELLY SHUE, 2018. "A Tough Act to Follow: Contrast Effects in Financial Markets," The Journal of Finance, vol 73(4), pages 1567-1613.

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