Samuel M. Hartzmark
Booth School of Business
University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
E-Mail: 
Institutional Affiliation: University of Chicago
NBER Working Papers and Publications
| September 2017 | A Tough Act to Follow: Contrast Effects In Financial Markets
with Kelly Shue: w23883
A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday’s earnings surprise was bad and less impressive if yesterday’s surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by a key alternative explanation involving information transmission from previous earnings announcements. Published: SAMUEL M. HARTZMARK & KELLY SHUE, 2018. "A Tough Act to Follow: Contrast Effects in Financial Markets," The Journal of Finance, vol 73(4), pages 1567-1613.
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