Market Reactions To Intangible Information: Underreaction, Overreaction, And Firm Characteristics

In this paper, the author examines investors' reaction to intangible stock returns that are orthogonal to accounting measures. The author shows that over the 1-year horizon typically associated with underreaction, investors tend to overreact to intangible information, giving rise to negative return forecastability for future returns. In addition, this effect is positively related to firm size. A zero investment portfolio strategy of longing (shorting) high (low) intangible return stocks yields an average annual buy-and-hold strategy of negative (positive) 22.57% (3.27%) among the smallest (largest) quartile firms. This phenomenon is robust to Fama-French risk controls.