LONG-TERM MARKET OVERREACTION - THE EFFECT OF LOW-PRICED STOCKS

Conrad and Kaul (1993) report that most of De Bondt and Thaler's (1985 ) long-term overreaction findings can be attributed to a combination o f bid-ask effects when monthly cumulative average returns (CARs) are u sed, and price, rather than prior returns. In direct tests, we find li ttle difference in test-period returns whether CARs or buy-and-hold re turns are used, and that price has little predictive ability in cross- sectional regressions. The difference in findings between this study a nd Conrad and Kaul's is primarily due to their statistical methodology . They confound cross-sectional patterns and aggregate time-series mea n reversion, and introduce a survivor bias. Their procedures increase the influence of price at the expense of prior returns.