RETURNS TO CONTRARIAN INVESTMENT STRATEGIES - TESTS OF NAIVE EXPECTATIONS HYPOTHESES

This paper examines the ability of naive investor expectations models to explain the higher returns to contrarian investment strategies. Con trary to Lakonishok, Shleifer, and Vishny (1994), we find no systemati c evidence that stock prices reflect naive extrapolation of past trend s in earnings and sales growth. Building on Bauman and Dowen (1988) an d La Porta (1995), however, we find that stock prices appear to naivel y reflect analysts' biased forecasts of future earnings growth. Furthe r, we find that naive reliance on analysts' forecasts of future earnin gs growth can explain over half of the higher returns to contrarian in vestment strategies.