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SESSION VI-2 : MARKET EFFICIENCY (21/12/2007 à 11h00)

Roland Gillet (Université de Paris 1 – Panthéon Sorbonne)

Corporate disclosure, information uncertainty and investors’ behavior: A test of the overconfidence effect on market reaction to goodwill write-offs

Auteurs : BESSIÈRE Véronique (CR2M - University Montpellier 2), SENTIS Patrick (CR2M - Gscm Montpellier Business School)

Intervenants : BESSIÈRE Véronique (CR2M – University of Montpellier 2)

Rapporteurs : MUELLER Christoph (University of Cologne)

This article examines the link between uncertainty and investors’ reaction to goodwill
write-offs (GWWOs) for a sample of French firms during the period 2001- 2004. Our
theoretical setting is derived from Daniel, Hirshleifer and Subrahmanyam (1998,
hereafter DHS98) who posit that overconfidence leads to an overreaction to private
information, followed by too little adjustments when the information becomes public and
then a long adjustment which reduce slowly the mispricing in the long run. We consider
three proxies for uncertainty – stock return volatility, analyst coverage and dispersion in
analyst forecasts – and sort two samples of GWWOs according to the level of uncertainty.
Our results confirm DHS98 model and, indirectly, that overconfidence is boosted by
uncertainty. We identify a particular corporate event – here a bad signal: goodwill write-
offs – and a particular context – high uncertainty – that fit DHS98 model, allowing private
information prospecting, overconfidence in this information and arbitrage obstacles. Our
tests confirm the overconfidence effect on investors’ reaction: the high-uncertainty sample
is characterized by strongly negative abnormal returns during the period preceding GWWOs
announcement, associated with high volatility. At the announcement date, negative abnormal
returns are observed in line with the selfattribution bias effect (the overreaction is strengthened
by a confirming signal). The overreaction to private information is corrected in the long run,
where we observe positive abnormal returns, creating a reversal. No abnormal returns are
observed for the low-uncertainty sample. This study offers interesting insights in two ways:
(i) in the area of financial markets and efficiency, it provides a test of a major over- and
under-reaction model, (ii) in the area of corporate finance and accounting, it helps to
explain investors’ reaction to corporate financial disclosure
according to a theoretical approach of information process and inference.

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Implied Cost of Capital Based Investment Strategies - Evidence from International Stock Markets

Auteurs : ESTERER Florian (Swisscanto Asset Management Ag), SCHROEDER David (Bonn School of Economics) Email :

Intervenants : SCHROEDER David (Bonn Graduate School of Economics)

Rapporteurs : ATANASOVA Christina (Simon Fraser University)

This paper demonstrates that investors can generate excess returns by implementing
trading strategies that are based on publicly available analysts’ forecasts. To capture
expectations of equity analysts, we employ the so-called implied cost of capital (ICOC).
Calculated as the internal rate of return that equates share price with discounted forecasted
cash-flows, the ICOC allows condensing a variety of analysts’ expectations about the
future of any company into one single figure. Our analysis across the world’s largest
stock markets shows that a simple portfolio strategy yields significant excess returns
with respect to several common asset pricing models.

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Riding Bubbles

Auteurs : KOLE Erik (Erasmus University Rotterdam), GUENSTER Nadja (Maastricht University), JACOBSEN Ben (Massey University)

Intervenants : KOLE Erik (Erasmus University Rotterdam) email :

Rapporteurs : LE SAOUT Erwan (Université Paris 1 Panthéon-Sorbonne & ESCEM)

Theoretical studies have yet to reach consensus on a rational investor's optimal response
to asset price bubbles. Their predictions vary between going short, sidelining, and riding
bubbles. We document patterns in U.S. industry returns that support riding bubbles as an
optimal response, consistent with the theory of Abreu and Brunnermeier (2003). An investor
who rides bubbles can earn abnormal returns in the order of 0.41% to 0.64% per month.
However, these high returns come at the expense of a high crash risk: upon the detection
of a bubble, the risk of a crash more than doubles. We evaluate the asset allocation
implications of this tradeoff in a mean-downside risk framework. The additional return an
investor can earn by riding a bubble more than offsets the higher risk of a crash.

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