Global Business and Finance Review (Mar 2001)
FOREIGN EQUITY AND MARKET OVERREACTION
Abstract
This study examines abnormal returns after extreme share price changes pursuant to American depository receipts (J/ DRs) ond international closed-end mutual.funds. The results may be especially relevant for market participants who are presently monitoring abrupt price movements in foreign securities and markets. For ADRs it appears that investors are too optimistic in their assessment of extreme price changes. Specifically. an under-reoction phenomenon is associated with extreme price declines (losers) and an overreaction phenomenon is associated with extreme price increases (winners). This finding is contrary to the overreaction hypothesis that predicts the market reacts too strongly to negative and po ·itive news, and is also contrary to the uncertoin information hypothesis that predicts stock prices increase ajier extreme price changes. For international closed-end mutual funds, the overreaction phenomenon is associated with losers and winners. Cross-sectional regression analyses are conducted to examine the effects ofthe initial price change, size (market value). information leakage, change in the year effects, and the Monday effect. There is evidence that the degree ofoverreaction is positively related ro the degree ofinformation leakage and the magnitude ofthe initial price change.
