Investor should sell their shares. But they tend not to do that. These are investor underreactions. The bottom line is that John Q. Market is overcorrecting when he should be holding steady to his financial course and not paying enough attention to the real blue skies and storms on the long-term investment horizon, Rau and Kadiyala concluded. Look at the past history of a company's stock.
History tends to repeat itself.
Past performance tends to be a good predictor of future performance. So the research indicates that investors should buy shares of good companies when they announce good news and sell shares of bad companies when they announce bad news. And if investors follow the professors' advice, they may not validate the efficient market hypothesis, but they should be more successful, which is even more important. We find that the long-run abnormal returns to firms announcing each of the four events can be explained by investor tendency to underreact to new information. Firms announcing corporate events after negative prior information earn significantly lower post-event abnormal returns than firms announcing these events after positive prior information released about the firm.