Finance

Physics

Business

Neuroscience

Perception

Value (mathematics)

Earnings surprise

Earnings

Mathematics

Financial economics

Statistics

Astronomy

Post-earnings-announcement drift

Artificial intelligence

Psychology

Economics

Earnings response coefficient

Contrast (vision)

Yesterday

Surprise

Computer science

Monetary economics

Social psychology

The Journal of Finance

ABSTRACT 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 an alternative explanation involving information transmission from previous earnings announcements.

A Tough Act to Follow: Contrast Effects in Financial Markets