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Information Uncertainty and Expected Returns

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Abstract

This study examines the role of information uncertainty (IU) in predicting cross-sectional stock returns. We define IU in terms of “value ambiguity,” or the precision with which firm value can be estimated by knowledgeable investors at reasonable cost. Using several different proxies for IU, we show that (1) on average, high-IU firms earn lower future returns (the “mean” effect), and (2) price and earnings momentum effects are much stronger among high-IU firms (the “interaction” effect). These findings are consistent with analytical models in which high IU exacerbates investor overconfidence and limits rational arbitrage.

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Authors and Affiliations

  1. Guanghua School of Management, Peking University, U.S.A

    Guohua Jiang

  2. Johnson Graduate School of Management, Cornell University, U.S.A

    Charles M. C. Lee

  3. Barclays Global Investors, 45 Fremont Street, San Francisco, CA, 94105, U.S.A

    Yi Zhang

Authors
  1. Guohua Jiang
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  2. Charles M. C. Lee
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  3. Yi Zhang
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Correspondence to Charles M. C. Lee.

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Jiang, G., Lee, C. & Zhang, Y. Information Uncertainty and Expected Returns. Rev Acc Stud 10, 185–221 (2005). https://doi.org/10.1007/s11142-005-1528-2

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  • DOI: https://doi.org/10.1007/s11142-005-1528-2

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