Suppressed Negative Information and Future Underperformance

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CFA Digest
February 2009 | Vol. 39 | No. 1 | 2 pages
Source: CFA Institute
Anna Scherbina
William H. Sackley, CFA (Reviewer)

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Summary

Good news travels rapidly, but bad news may not travel. The author finds that a decrease in analyst coverage of a company signals unreported bad news about the company. This result is reflected in subsequent negative earnings surprises, particularly for small companies. The author shows that low returns on under-reported companies come from initial mispricing rather than low risk because sophisticated investors—in particular, institutions—tend to sell stock as unreported negative information accumulates.

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