Overreaction Analysis in State-Owned Equities

Abstract

This paper challenges the research hypothesis that psychological factors and market sentiment can influence and alter the trajectory of state-owned equities. For this purpose, an overreaction analysis was performed in a wide data spectrum consisting of daily returns of 184 state-owned enterprises operating in countries from three continents, over a ten year period divided in five biannual test periods. Portfolio separation and Cumulative Abnormal Returns generated no evidence towards the existence of overreaction phenomena across all test-periods. Average and Median Cumulative Abnormal Returns, tested with parametric and nonparametric statistical analysis, did not exhibit reversal patterns in the behavior of loser and winner portfolios, thus neutralizing the possibility of earlier overreaction in the state-owned stocks under study. The outcome concerning state-owned enterprises contrasts with the corresponding research hypothesis and outcomes in the literature regarding behavioral economics and overreaction effects in private enterprises.