Title: Is overreaction/underreaction chosen by managers? Evidence from Greece

Authors: William Forbes; George Giannopoulos; Len Skerratt

Addresses: School of Business and Management, Queen Mary University of London, Mile End Road, London, E1 4NS, UK ' Accounting, Finance and Informatics Department, School of Business, Kingston University, Kingston Hill Campus, Kingston-Upon-Thames, KT2 7LB, UK ' Brunel Business School, Brunel University London, Uxbridge, UB8 3PH, UK

Abstract: This paper models overreaction/underreaction as being the outcome of company managers' choices to manipulate earnings in response to perceived mispricing of their company. One of the more prominent attempts to reconcile observed short-term overreaction and consequent secular underreaction to earnings news interprets earnings announcements as 'selective' events. In financial markets events are 'selected' when contrived in response to perceived asset mispricing. We interpret earnings management by managers as a process requiring a selection of earnings in response to perceived mispricing of their corporation's stock. Post-earnings announcement drift is then interpreted as one consequence of this form of managerial choice. We devise and test a trading strategy, implemented at the earnings announcement date, based on the level of discretionary accruals in relation to past mispricing. The profitability of such a strategy is tested and conclusions for attempts to reconcile short-term overreaction with secular underreaction are drawn.

Keywords: underreaction; selective earnings; perceived mispricing; earnings announcements.

DOI: 10.1504/IJFMD.2021.115859

International Journal of Financial Markets and Derivatives, 2021 Vol.8 No.2, pp.116 - 147

Received: 07 Sep 2019
Accepted: 29 Feb 2020
Published online: 25 Jun 2021 *

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