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This paper presents a decomposition of short-horizon contrarian profits into various sources based on an analysis os stock price reactions to common factors an firm-specific information. In sharp contrast with the conclusions in the extant literature, we find that the lead-lag structure in stock prices contributes less than 5% of the observed contrarian profits with most of the profits being attributable to stock price overreaction.

This paper shows that the pattern of short term negative serial covariances for stock returns over different return measurement intervals is consistent with the implications of inventory-based market microstructure models. The results of the tests developed in this paper indicate that the short horizon return reversals can to a large extent be explained by transitory components in prices related to imbalances in specialists’ inventory positions. The evidence also suggests that the stock market may be as liquid or resilient as suggested by some earlier studies.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jfineco.2005.08.004 Byline: Brian J. Henderson (a), Narasimhan Jegadeesh (b)(c), Michael S. Weisbach (c)(d) Keywords: International debt issues; International equity issues; Market timing Abstract: We examine the extent to which firms from different countries rely on alternative sources of capital, the locations in which they raise capital, and the factors that affect these choices. During the 1990-2001 period, firms raised about $25.3 trillion of new capital, including $4.9 trillion from abroad. International debt issuances are substantially more common than equity issuances, with debt (equity) issues accounting for 87% (9%) of all securities issued internationally, and about 20% (12%) of all public debt issuances. Market timing considerations appear to be important in security issuance decisions in most countries. Author Affiliation: (a) Stillman School of Business, Seton Hall University, South Orange, NJ 07079, USA (b) Emory University, Atlanta, GA, 30322, USA (c) National Bureau of Economic Research, Cambridge, MA, 02138, USA (d) University of Illinois at Urbana-Champaign, Champaign, IL, 61820,USA Article History: Received 27 February 2004; Revised 11 February 2005; Accepted 3 August 2005 Article Note: (footnote) [star] We thank George Benston, Dirk Jenter, Andrew Karolyi, Marco Pagano, Jay Ritter, Bhaskaran Swaminathan, David Weisbach, Jeff Wurgler, an anonymous referee, and participants in presentations at the 2005 AFA Meetings in Philadelphia, Boston University, Columbia University, Cornell University, Georgetown University, Georgia Tech's International Finance Conference, Ohio State University, Seton Hall University, the University of Central Florida, the University of Illinois, the University of Michigan, the University of Toronto, and Yale University for helpful suggestions. Brian Henderson received financial support from the Illinois Center for International Business Education and Research.

We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The result suggest a market that responds only gradually to new information. (Reprinted by permission of the publisher.)