Abstract
This study examines whether salience theory predicts the effect of a 52-week high (WH) on stocks in the Taiwanese stock market. The evidence indicates enhanced profits for WH when stocks with extremely salient payoffs are excluded. Salience-induced overvaluation mitigates investors' underreaction to good news when prices are near the WH, thus leading to non-significant positive returns for stocks with salient upsides. In contrast, salient downsides exacerbate investors' underreactions to good news when prices are close to their WHs, leading to greater positive returns. These findings do not result from short-term return reversals or investor attention. This effect is more pronounced for the stocks with higher arbitrage limits. The overestimation of the salient upsides dominates the underreaction to the WH when investors experience capital losses, high-sentiment, and upward market states.
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