On the Efficiency of Intra-Industry Information Transfers : The Dilution of the Overreaction Anomaly

We revisit the stock market anomaly documented by Thomas and Zhang (2008) and show that the apparent mispricing of information transfers has decayed over time, as the US markets experienced rapid improvements in the efficiency of the underlying price formation processes. Utilizing recent advancements in market microstructure research to estimate firm-specific proxies for market efficiency, we demonstrate that the existence of the overreaction anomaly (where stock prices of late announcers in response to the earnings reported by early announcers in the same industry are negatively related to subsequent price responses of late announcers to their own earnings reports) is specific to an earlier sample period and results from the inefficient incorporation of information into prices, largely attributable to an environment with high barriers to arbitrage. Our results indicate that the pricing efficiency of intra-industry information transfers has increased in the recent years of increased liquidity and markedly higher trading activity