The conservatism bias in an emerging stock market: Evidence from Taiwan

Behavioral theories predict that investors underreact to earnings announcements stemming from the conservatism bias and overreact to a string of earnings news due to representativeness heuristic. This paper thus examines trading strategies of buying past high EPS growth stocks and selling past low EPS growth stocks over 4 to 20 quarters. The results generally support conservative reactions in the medium-term horizon, but provide little support for the over-use of representativeness heuristic on the long-term horizon. Moreover, we find that investors react differently to the consistency sequences of the two extreme earnings growth portfolios.