Abstract
This paper provides evidence that the 52-week high serves as a psychological barrier, inducing expectational errors and underreaction to news. Two clear predictions emerge and are conrmed in the data. First, nearness to a 52-week high induces expectational errors; evidence from earnings surprises and analyst price targets indicates that investor and analyst expectations are biased in a downward direction for stocks near a 52-week high and biased in an upward direction for stocks trading far from a 52-week high. Second, nearness to a 52-week high induces underreaction to news. Among positive earnings surprise stocks, post-announcement drift exists only for those stocks near a 52-week high. The evidence suggests that in contrast to currently oered preference-based explanations, a belief-based explanation may better explain the previously documented 52-week high anomalies.
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