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Answer: overreaction effect, where investors tend to overreact to unexpected public information, causing stock prices to overshoot their intrinsic value.
The **overreaction effect** is the correct answer because it describes the tendency of investors to overreact to unexpected public information, leading to stock prices overshooting their intrinsic value. This aligns with the scenario where a company's stock price is inflated after releasing unexpected good news. The **value effect** (A) is a cross-sectional anomaly unrelated to information releases, while the **turn-of-the-year effect** (C) is a calendar anomaly specific to January returns.
Author: LeetQuiz Editorial Team
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The observation that a large-capitalization company's stock price is inflated after the company releases unexpected good news at year end is most likely related to the:
A
value effect, which refers to the outperformance of value stocks with below-average price-to-earnings and market-to-book ratios over time, unrelated to information releases.
B
overreaction effect, where investors tend to overreact to unexpected public information, causing stock prices to overshoot their intrinsic value.
C
turn-of-the-year effect, a calendar anomaly where stock returns in January are significantly higher, unrelated to information releases.
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