52-week High Price Research Articles

Shared analyst coverage, 52-week high, and cross-firm return predictability

In this study, we show that the return predictability of analyst-connected firms is positively correlated with nearness to 52-week high stock prices. Our results are robust to tax loss selling and penny stocks and when controlling for market factors and macroeconomic conditions. The impact of the 52-week high on the analyst-connected momentum effect is stronger among focal stocks of smaller firms, those with lower institutional ownership, and those with less analyst coverage. Moreover, the greater the number of shared analysts, the stronger the relationship between firm fundamentals, resulting in stronger return predictability. When both focal and analyst-connected firms have stock prices near (far from) their 52-week highs, there is a stronger underreaction to good (bad) news about analyst-connected firms.

Overnight returns, daytime reversals, and anchoring bias

ABSTRACT This study explores the impact of anchoring bias on the daily tug-of-war in financial markets, specifically examining the reversal dynamics between overnight and daytime periods in relation to the 52-week high price. After analysing the interplay between anchoring bias and the abnormal intensity of the tug-of-war (AB_NR), our findings reveal a significant AB_NR premium for stocks far from their 52-week high prices. This sheds light on the important role of psychological barriers faced by noise investors during overnight periods in shaping return dynamics.

The Effect of the Movement in 52-Week High on Momentum Profit: The Evidence from Taiwan

Purpose: This paper aims to examine the impact of price movements in 52-week highs on a 52-week high momentum strategy. This study refers to the upward or downward movement in 52- week highs as an updating effect and determines how this effect influences the profitability of the original 52-week high momentum strategy. Design/methodology/approach: This paper decomposes the ratio of stock price to 52-week high into denoted two components: price change and updating components. We construct two momentum strategies, each focusing on adjusting either the price change or the updating component. Additionally, we employ a portfolio approach and Fama-MacBeth regression analysis to investigate the profitability of each proposed momentum strategy. Findings: The empirical results reveal that removing the price change component (updating component) from the original 52-week high measure can increases (decreases) the momentum profit, implying that the updating component dominates the price change component. Moreover, our analysis shows that when a high ratio of stock price to 52-week high is driven by a downward updating event, the subsequent positive momentum for a winner portfolio is more substantial. Research limitations/implications: This paper investigates the influence of 52-week highs movement on momentum strategies, utilizing data from Taiwan stock market. The findings reveal that accounting for the updating effect of 52-week highs can enhance the profitability of the original momentum strategy. However, it is important to note that this conclusion is currently limited to relatively inefficient stock markets. The impact on relatively efficient markets remains an area that requires further research for a comprehensive understanding. Originality/value: The finance literature widely acknowledges the 52-week high price as a reference point that can impact investors' trading psychology. Numerous empirical studies have confirmed the profitability of the 52-week high momentum investing strategy. However, these studies have not thoroughly explored the implications and effects of price movements within the scope of a 52-week high momentum strategy. Taking behavioral perspectives into account, this paper considers that the updating of 52-week high prices can influence investors' attention and subsequently impact the profitability of the momentum strategy.

Anchor Reversion: The Case of the 52-Week High and Asset Prices

This study attempts to jointly identify the effects of anchoring and mean reversion on asset prices. In particular, we define “anchor reversion” as the tendency for stock prices to revert back toward an anchor, for example, the 52-week high. Our results show that the further a stock moves away from its 52-week high, the more likely it is to revert back toward that 52-week high in the following month. Conversely, if a stock moves toward its 52-week high in a given month, it is less likely to experience a large movement toward that 52-week high in the following month. Portfolios constructed according to a long-short anchor reversion strategy result in future returns that range from 1.40% to 1.62% per month. These results are robust to controls for various risk factors as well as several cross-sectional stock characteristics, such as the monthly reversal phenomena.

The role of anchoring on investors’ gambling preference: Evidence from China

This paper examines the anchoring effect of 52-week high price on the investors’ gambling preference in the Chinese A-share market. We document the gambling preference only exists among stocks valued much lower than their 52-week high prices. Specifically, using return skewness as a proxy for lottery stocks, we find that buying stocks in the lowest skewness quintile and selling the highest earns a significant risk-adjusted return of 0.85% per month for stocks far below their 52-week high prices. By contrast, it earns an insignificant return of 0.04% per month for stocks close to their 52-week high prices. Moreover, high arbitrage risk and investor sentiment strengthen the effect of anchoring on gambling preference. Our findings are robust after considering the effects of capital gains overhang, under-reaction to news, firm’s ownership status, and China’s non-tradable share reform.

Limited attention, salient anchor, and the modified MAX effect: Evidence from Taiwan’s stock market

The literature documents that investors overweighing the right-tail probability pursue positively skewed assets, leading to lottery-like stocks overpriced. We find that the lottery anomaly primarily exists among stocks further away from their 52-week high prices. After attention-grabbing events with gambling features, inattentive retail investors become aware of certain stocks’ gambling traits and then net buy more lottery-like stocks, which further promotes the lottery anomaly. However, when such stocks are near their 52-week high price, retail investors tend to place little weight on the likelihood that the stock price will rise beyond the 52-week high, thereby reducing the skewness preference. Overall, our findings suggest that the perception of the 52-week high price as a price ceiling influences skewness preference, and that investor attention is the main determinant of whether anchoring bias affects skewness preference.

Expected profitability, the 52-week high and the idiosyncratic volatility puzzle

We investigate the joint ability of fundamental-based and market-based news to explain the anomalous underperformance of stocks with high idiosyncratic volatility (high IVOL). An out-of-sample prediction of future profitability is adopted as a proxy for fundamental–based news while market-based news is represented by the 52-week high price ratio. A sample of UK stocks over the period January 1996 to December 2017 is analysed. The empirical results indicate that both the fundamental-based projected profitability and the 52-week high price ratio are important in explaining the IVOL anomaly. In contrast, individually, neither variable fully accounts for the anomaly. This relation is more pronounced following a period of high sentiment and during an upmarket. Further results suggest that underreaction lies at the heart of this explanation.

Reference prices, relative values, and the timing of M&A announcements

The bidder's relative value with respect to the target (RV) and its 52-week reference values affect who bids for whom as well as the timing of public announcement for bidder-target pairs that announce deals. Deals that are announced when the RV is near its 52-week high feature more stock payment, higher offer premium relative to the target's pre-announcement price but a larger discount relative to the target's 52-week high price, result in more negative announcement returns for the bidding firm in both the short and long run, and are less likely to be completed. Yet, bidders in such deals also experience large and positive abnormal returns over the period from private initiation of discussions with the target to twelve months after announcement. Our results suggest that bidders use past values of RV as reference points to assess relative misvaluation and to strategically choose announcement timing.

Psychological barrier and cross-firm return predictability

We provide a psychological explanation for the delayed price response to news about economically linked firms. We show that the return predictability of economically linked firms depends on the nearness to the 52-week high stock price. The interaction between news about economically linked firms and the nearness to the 52-week high can partially explain the underreaction to news about customers, geographic neighbors, industry peers, or foreign industries. We also find that analysts react to news about economically linked firms but the 52-week high effect reduces such reactions, providing direct evidence that the 52-week high affects the belief-updating process.

Empirical evidence on the profitability of momentum trading strategies using ETFs

PurposeWe extend empirical evidence on the profitability of momentum trading to the realm of plain-equity ETFs.Design/methodology/approachWe employ several ranking measures used in prior research, and for each we apply a traditional ranking based on total return, and a variation based only on the capital gain/loss portion of return.FindingsWhile we find that past momentum is not a strong predictor of future performance in our overall sample period, 2007 to June 2018, we find that the percent off 52-week high price results in positive performance in the recovery years following the financial crisis of 2008–2009.Research limitations/implicationsOur study is limited by the availability of ETF experience and data, and our test period covers just 2007 through June 2018. This period includes the financial crisis of 2008–2009, which previous research finding is associated with the momentum strategy's loss of profitability. When we exclude that period, we find evidence of a profitable momentum strategy based on the measure of percent off 52-week high price, enabling us to reject the null hypothesis that the momentum trading strategy is no longer profitable.Practical implicationsIt is profitable based on both return measures used in the rankings. Our finding of a profitable momentum trading strategy suggests that the null hypothesis that the momentum strategy is no longer profitable can be rejected.Originality/valueWhile perhaps not so strong as to reject the efficient markets hypothesis fully, our empirical findings are more consistent with a behavioral explanation and a market inefficiency. In view of the relative ease and low transactional costs of trading in ETFs, the markets have yet another opportunity to recognize an apparent mispricing and employ arbitrage based on it. To the extent that the relative ease of trading in ETFs makes momentum strategies easier to employ, the momentum anomaly might still be expected to disappear in an efficient market.

The role of psychological barriers in lottery-related anomalies

It is well documented that stocks with lottery-like characteristics are overpriced. We find that the lottery-related anomaly exists primarily among stocks that are far from their 52-week high prices. When implemented among such stocks, the strategy of buying the least lottery-like stocks and selling the most delivers a significantly positive risk-adjusted return of 2.22% per month. In contrast, it yields an insignificant negative return of -0.31% per month for stocks near their 52-week high. The pattern holds after controlling for capital gains overhang and idiosyncratic volatility. We also find that investors’ optimistic earnings forecasts for lottery-like stocks are attenuated by their nearness to the 52-week high. Our findings suggest that investors consider the 52-week high as the upper price limit and that this psychological barrier affects their preferences for lottery-like stocks.

Disposition effect at the market level: evidence from Indian stock market

PurposeThe purpose of this paper is to test the disposition effect at market level and propose an appropriate reference point for testing disposition at market level.Design/methodology/approachThis is an empirical study conducted on 500 index stocks of NSE500 (National Stock Exchange). Winning and losing days for each stock are calculated using 52-week high and low prices as reference points. To test disposition effect, abnormal trading volumes of stocks are regressed on their percentage of winning (losing) days. Further using ANOVA, the difference between mean of percentage of winning (losing) days of high abnormal trading volume deciles and low abnormal trading volume deciles is tested.FindingsResults show that a stock’s abnormal trading volume is positively influenced by the percentage of winning days whereas percentage of losing days show no such effect. Findings are consistent even after controlling for volatility and liquidity. ANOVA results show the presence of high percentage of winning days in higher deciles of abnormal trading volumes and no such pattern in case of losing days confirms the presence of disposition effect. Further an ex post analysis indicates that disposition prone investors accumulate losses.Originality/valueThis is the first study, which proposes the use of 52-week high and low prices as reference points to test the market-level disposition effect. Findings of this study enhance the limited literature available on disposition effect in emerging markets by providing evidence from Indian stock markets.

Cross-border transactions, mergers and the inconsistency of international reference points

Reference point theory is a well-established phenomenon in the behavioral economics field (Anchoring Theory). Its broad implications also extend to financial topics. For example, Baker et al. (2012) demonstrate the impact of a range of reference points related to 52-week high stock price on domestic merger and acquisition activity. The anchoring behavioral bias is universal and not limited to the United States. An investigation into the power and impact of reference points in explaining merger and acquisition activity in an international setting is valuable as firms face heterogeneous legal, regulatory, and market conditions. In addition, cross-border mergers change the legal structure of the shares of the target firm. Using the 52-week high share price of the target, this study investigates the impact of increased information asymmetry in estimating synergistic effects.

Acquirer reference prices and acquisition performance

In a comprehensive sample of mergers and acquisitions, we find a reference price effect: acquirers earn higher (lower) announcement-period returns when their pre-announcement stock prices are well below (near) their 52-week highs. This reference price effect is stronger in acquisitions of private targets, deals involving greater uncertainty, and acquirers with greater individual investor ownership, and it is reversed in the subsequent year. Further, acquirer reference prices affect bid premia and target announcement-period returns in deals with greater uncertainty in acquirer valuation. The overall evidence is consistent with investors irrationally using 52-week high prices as a measure of acquirer valuation.

Anchoring in Mergers and Acquisitions: Does the Regulatory Environment Matter?

We examine the 52-week anchoring effect in the Indian takeover market that has a unique regulatory design. The Indian takeover regulation mandates the minimum offer price to be function of the target’s 26-week or 60-day high price. We show that the 52-week anchoring effect is robust even in the face of other regulatory anchors that differ from the widely cited 52-week high price. The anchoring effect dominates when the offer price exceeds the 52-week high price. Regulatory intervention in 2011 that shifts the floor price to a recent market price, such as the 60-day high price, does not attenuate the 52-week anchoring effect. We infer that acquirers are willing to pay a higher premium while anchoring to the 52-week high price, even when the regulatory focus is on lower reference prices. Besides, regulatory anchors also serve as additional focal points, demonstrated by the significance of the 26-week high price during its own period of regulation (2002-2011).

Target Price Forecasts: Fundamentals and Behavioral Factors

This paper reveals both fundamental and non-fundamental factors play an important role in analysts’ target price formation. Analysts’ forecasts of short-term earnings and long-term growth are shown to be important explanatory variables for target prices; equally, the following salient non-fundamental factors are also shown to explain target price levels and especially target price biases: the 52-week high price and recent market sentiment. Here, increases in the 52-week high and market sentiment measures of one standard deviation correspond to increases in positive target price bias of 4.8% and 14.7%, respectively. Initially our analysis is constrained to analysts who provide long-term growth forecasts, however, our findings are robust to the removal of this constraint and the broader set of analysts. Our analysis reveals that analysts place greater weight on these non-fundamental factors in settings with greater task complexity and/or resource constraints, and when they rely on valuation heuristics as opposed to more rigorous valuation methodology, and that this greater weight is associated with increased optimistic bias. Finally, our results show that analysts’ target prices are useful in predicting future stock returns beyond earnings forecasts and commonly used risk proxies. However, in an internally consistent fashion, the informativeness of target prices for future returns is significantly reduced when greater weight is placed on either the 52-week high or recent market sentiment in the target price formation process.

Do foreign investors mitigate anchoring bias in stock market? Evidence based on post-earnings announcement drift

In this paper, we examine the role of foreign investors in the anchoring bias of stock markets. While the existing behavioral finance literature is mostly based on established capital markets like U.S. and U.K., this paper focuses on emerging economy in which foreign investors are important stockholders. Using a sample of common stocks listed on the Korea Stock Exchange between 2001 and 2014, we document the following empirical results. First, the nearness of current price to the 52-week high is positively related to the magnitude of post-earnings announcement drift (PEAD). This indicates that investors are hesitant to revise their beliefs upward (downward) when positive (negative) surprises arrive if the price is already near (far below) its 52-week high, on average. More important, the positive relation between the price proximity to the 52-week high and PEAD disappears for stocks with high level of foreign investor ownership, suggesting that anchoring effect of stocks' 52-week high prices is mitigated by foreign investors. Also, dedicated foreign institutions play an important role in mitigating the extent of PEAD due to anchoring bias. These findings add new evidence to the literature that sophisticated foreign investors reduce market anomaly because they are less subject to cognitive bias such as anchoring on 52-week high stock price in forming earnings expectations.

Psychological Barrier and Cross-Firm Return Predictability

We provide a psychological explanation for the delayed price response to news about economically linked firms. We show that the return predictability of economically linked firms depends on the nearness to the 52-week high stock price. The interaction between news about economically linked firms and the nearness to the 52-week high can partially explain the underreaction to news about customers, geographic neighbors, industry peers, or foreign industries. We also find that analysts react to news about economically linked firms but the 52-week high effect reduces such reactions, providing direct evidence that the 52-week high affects the belief-updating process.

The 52-week high, q-theory, and the cross section of stock returns

The Hou et al. (2015) q-factor model outperforms other factor models in capturing the price-to-high (PTH, the ratio of current price to 52-week high price) anomaly; that is, high-PTH stocks earn high future returns. PTH's relations with future profitability and future investment growth are both significantly positive, and they mirror PTH's relation with future returns in the cross section and by time horizons. Incorporating the information about future investment growth contained in price level variables (e.g., PTH) helps the q factors to capture better those anomalies rooted in future investment growth. Together, these results suggest that the PTH anomaly is consistent with the investment capital asset pricing model.

The Role of Psychological Barriers in Lottery-Related Anomalies

Previous studies find that stocks with lottery features are overpriced. We show that anomalies induced by investors’ lottery preferences exist primarily among stocks that are far from their 52-week high prices. The results suggest that if stocks are near their 52-week highs, investors no longer prefer lottery stocks since they consider the 52-week high a psychological barrier or an upper bound for prices. We find that the dependency between lottery-related anomalies and nearness to the 52-week high is pronounced among stocks with low institutional ownership. Alternative explanations, such as limits to arbitrage and capital gains, do not explain our results.