Abstract
This paper finds that low-price stocks' earnings announcement returns are significantly lower than those of high-price stocks. In contrast, we do not find such underperformance outside announcement periods. This evidence suggests that the cognitive bias induced by low share prices are corrected when and only when investors are confronted with hard evidence. Interestingly, we find that stock analysts are subject to the same bias when they forecast earnings. Regarding options, although the underperformance of OTM calls written on low-price stocks is more pronounced around earnings announcements, it remains significant outside announcement windows, suggesting different behaviors of stock and options traders.
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