FOREIGN EQUITY AND MARKET OVERREACTION

This study examines abnormal returns after extreme share price changes pursuant to American depository receipts (ADRs) and international closed-end mutual funds. The results may be especially relevant for market participants who are presently monitoring abrupt price movements in foreign securities and markets. For ADRs it appears that investors are too optimistic in their assessment of extreme price changes. Specifically. an under-reaction phenomenon is associated with extreme price declines (losers) and an overreaction phenomenon is associated with extreme price increases (winners). This finding is contrary to the overreaction hypothesis that predicts the market reacts too strongly to negative and positive news, and is also contrary to the uncertain information hypothesis that predicts stock prices increase after extreme price changes. For international closed-end mutual funds, the overreaction phenomenon is associated with losers and winners. Cross-sectional regression analyses are conducted to examine the effects of the initial price change, size (market value), information leakage, change in the year effects, and the Monday effect. There is evidence that the degree of overreaction is positively related to the degree of information leakage and the magnitude of the initial price change.