Roger K. Loh

Streaks in Earnings Surprises and the Cross-Section of Stock Returns

The gamblers fallacy [Rabin, M. 2002. Inference by believers in the law of small numbers. Quart. J. Econom.117(3) 775--816] predicts that trends bias investor expectations. Consistent with this prediction, we find that investors underreact to streaks of consecutive earnings surprises with the same sign. When the most recent earnings surprise extends a streak, post-earnings-announcement drift is strong and significant. In contrast, the drift is negligible following the termination of a streak. Indeed, streaks explain about half of the post-earnings-announcement drift in our sample. Our results are robust to more general definitions of trends than streaks and a battery of control variables including the magnitude of earnings surprises and their autocorrelation. Overall, post-earnings-announcement drift has a significant time-series component that is consistent with the gamblers fallacy. This paper was accepted by Wei Xiong, finance.

Realization Utility and Real Estate

Using unique data on condominium transactions that allow for accurately-measured capital gains and losses, we examine the impact of these gains and losses on homeowner decisions. Consistent with the disposition effect, owners with a gain have higher sell propensities than those with a loss. Since real estate prices result from owner negotiations with buyers and tenants, we also examine whether prices vary across otherwise comparable units depending on the owner’s capital gain. Owners with a gain accept lower selling prices, list for sale at lower prices, and accept lower rents from tenants. These pricing implications are sensitive to the magnitude of an owner’s gain, which is consistent with realization utility, and are economically large. For example, units with a capital gain have selling prices that are 5% lower than those with a capital loss. Overall, our findings indicate that realization utility influences homeowner decisions. Alternative explanations such as financing constraints, informed trading, and mean reversion cannot explain our results.Using unique real estate data that allow for accurately-measured capital gains, we examine whether sell propensities and selling prices depend on the magnitude of a sellers capital gain. We find that sell propensities are higher and selling prices are lower for properties with a larger gain. Sell propensities also experience a discontinuity at a zero capital gain. Our findings provide empirical support for realization utility (Barberis and Xiong, 2012) but are inconsistent with informed trading and financing constraints.