Is It Anchoring? Information Discreteness and the Performance of a 52-Week-High Strategy

The superior performance of stocks trading near their 52-week-high prices has been attributed to underreaction stemming from investors' anchoring bias. The author tests and finds robust supporting evidence for another source of underreaction—investor inattention to continuous information. Using an intuitive and readily implementable measure of information discreteness, he documents that the returns to the 52-week-high strategy are significantly higher among stocks with past continuous information as compared to stocks with past discrete information. The result is evident in risk-adjusted returns, in non-January months, among large and small stocks, across alternative holding and sample periods, and robust to controls for common return predictors in cross-sectional regressions. Further corroborating evidence is obtained from a strategy based on the 52-week-low price that earns significant returns among stocks with past continuous information but insignificant returns among stocks with past discrete information. Investors can achieve substantial performance gains by implementing the 52-week-high and 52-week-low strategies among stocks with past continuous information.