Moderated Confidence and Under- and Overreactions to Related Firm's News

In a single information transfer setting, we detect both under- and overreactions of stock prices to corporate earnings news. We find that the stock prices of a firm's blockholder underreact to the firm's earnings news but the stock prices of the firm overreact to its blockholder's earnings news. This new evidence of short-term under- and overreactions in a single setting is consistent with the moderated confidence hypothesis, which predicts that investors tend to bias their estimated signal precision toward the unconditional mean, causing predictable under- (over-) reaction to precise (imprecise) signals. Our study suggests that moderated confidence may play an important role in explaining stock market anomalies