Information Uncertainty and Expected Returns

This study examines the role of information uncertainty (IU) in predicting cross-sectional stock returns. We define IU in terms of "value ambiguity," or the precision with which firm value can be estimated by knowledgeable investors at reasonable cost. Using several different proxies for I...

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Bibliographic Details
Published in:Review of accounting studies 2005-09, Vol.10 (2-3), p.185-221
Main Authors: Jiang, Guohua, Lee, Charles M. C., Zhang, Yi
Format: Article
Language:English
Subjects:
Arbitrage
Bias
Costs
Earnings
Financial analysis
Forecasting
Investments
Proxies
Rates of return
Stocks
Studies
Uncertainty
Volatility
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Summary:This study examines the role of information uncertainty (IU) in predicting cross-sectional stock returns. We define IU in terms of "value ambiguity," or the precision with which firm value can be estimated by knowledgeable investors at reasonable cost. Using several different proxies for IU, we show that (1) on average, high-IU firms earn lower future returns (the "mean" effect), and (2) price and earnings momentum effects are much stronger among high-IU firms (the "interaction" effect). These findings are consistent with analytical models in which high IU exacerbates investor overconfidence and limits rational arbitrage. [PUBLICATION ABSTRACT]
ISSN:1380-6653
1573-7136
DOI:10.1007/s11142-005-1528-2