An Empirical Evaluation of Behavioral Models Based on Decompositions of Stock Prices,

Abstract

Several behavioral models have been proposed to explain the observed short-horizon continuation and long-horizon reversals in returns. We employ a time-series framework of identifying tangible and intangible information based on two valuation models: the conventional dividend discount model and the residual income model. We find investors overreact to intangible information but underreact initially to tangible information, with no significant reversal associated with tangible information in the long run. Our finding is compatible with models incorporating investors' overconfidence in their private information. We also find that the residual income model provides a better valuation than the dividend discount model.