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This study adopts the methodology introduced by Lee (2006) to analyze stock prices in response to information shocks in six of Taiwan's stock market sectors and present market anomalies utilizing behavioral finance theory. Using the Residual Income Model (RIM) of equity valuation, we specified our empirical model to identify structural fundamental and nonfundamental shocks from reduced-form tangible and intangible news, and we obtained three major results. First, fundamental shock is primarily induced by tangible news and nonfundamental shock by intangible news, suggesting that tangible-oriented RIM can capture the information content of stock prices. Second, impulse response analyses show that investors generally underreact to fundamental shocks and consistently overreact to nonfundamental shocks in the short-run. This finding is compatible with the overconfidence theory of Daniel et al. (1998) in behavioral finance literature. Third, information diffusion efficiency in a market appears to depend on the value relevance quality of its tangible information. This is based on our finding that when tangible information constitutes a higher share of a market's fundamental shock, its price converges faster to the long-run equilibrium associated with the shock.

AbstractThe spot price on the Taiwan stock index is richer in information than the futures price judged by the price discovery measures of Gonzalo and Granger [Gonzalo, J., & Granger, C.W.J. (1995). Estimation of common long‐memory components in cointegrated systems. Journal of Business and Economic Statistics, 13, 27–35.] and Hasbrouck [Hasbrouck, J. (1995). One security, many markets: Determining the contributions to price discovery. Journal of Finance, 50, 1175–1199.]. What is special about the markets is that both the spot and futures error‐correction coefficients are positive, implying a digressive convergence to their long‐run equilibrium in the error‐correction (EC) process. Innovation accounting suggests that the cause of this digressive equilibrium adjustment is that investors systematically overreact to news in the less informative futures market but under‐react to the more informative spot market. Our contribution is in identifying the digressive convergence implied by same‐sign EC coefficients, comparing it to the normal convergence widely found in opposite‐sign EC models, and providing short‐run mispricing interpretations for both types of convergence to equilibrium.