Stock Price Overreaction Effect: Evidence on Nasdaq Stocks, The

Quarterly Journal of Finance and Accounting, Summer 2005 by Ma, Yulong, Tang, Alex P, Hasan, Tanweer

Data and Method

Data

We select our sample firms from the Wall Street Journal (WSJ) microfilm. In the "Stock Market Data Bank" column of section C, the WSJ lists the top 20 gainers and losers from the New York Stock Exchange, top 14 gainers and losers from the Nasdaq National Market System, and top five gainers and losers from the American Stock Exchange. From the daily listing, we select the firms with the highest percentage gains and losses in both the New York Stock Exchange and the Nasdaq National Market System for each trading day from January 1996 through December 1997. That is, for each trading day, we select only two firms from each market, the best and worst performers based on daily percentage return.

We choose the initial NYSE and Nasdaq sample firms in this manner for two reasons. First, firms with the highest percentage gains and losses should best exhibit overreaction behavior and provide the strongest empirical evidence. second, we can perform comparative analyses between best- and worst-performing stocks and between NYSE and Nasdaq stocks.

The initial sample size includes 1,012 observations. Within the initial sample firms, we use the following screening procedure to construct the final sample. First, to prevent the estimation period from being contaminated, we remove from the sample any firms that appear more than once as the highest percentage gainer or loser within a six-month period. second, we find the stock CUSIP numbers based on the abbreviations of firm names we obtain from the WSJ. Third, we then use these CUSIP numbers to match firms on the 2002 Daily CRSP Database. Finally, we eliminate from further analysis those firms with fewer than 60 daily returns during the estimation period from -120 to -21 event days. Panel A of Table 1 shows the final sample firm distribution and firm value.

The total market value of a firm's equity is used as an estimate of firm value. We use stock prices on the event days of -5, -6, or -7 in the estimation of firm value, depending on the availability of stock prices on these event days. Table 1 reports the average firm value for each of the four sample firms. As shown in the table, the NYSE gainers and losers are much larger than their counterparts on Nasdaq. The size difference motivates us to use different market indexes for NYSE stocks and Nasdaq stocks calculating abnormal returns.

We then examine the WSJI (Corporate Edition) and check to see if there is any company-specific news during a three-day window around the event day. We want to know if the gains or losses are associated with certain particular news. Panel B of Table 1 presents the results of this search.

It appears that except for the group with no news, the largest subsample of NYSE and Nasdaq gainers are associated with mergers and acquisitions news. The second largest subsample gainers are associated with revenues and earnings news. The largest subsample of NYSE and Nasdaq losers are associated with news of revenues and earnings news. The second largest subsample losers are associated with earnings warnings.