We examine the extent to which the stock market’s inefficient responses to resolutions of uncertainty depend on investors’ biased ex-ante beliefs regarding the probability distribution of future event outcomes or their ex-post irrational reactions to these outcomes. We use a sample of publicly traded European soccer clubs and analyze their returns around important matches. Using a novel proxy for investors’ expectations based on contracts traded on betting exchanges (prediction markets), we find that within our sample, investor sentiment is attributable, in part, to a systematic bias in
investors’ e- ante expectations. Investors are overly optimistic about their teams’ prospects e- ante and, on average, end up disappointed e- post, leading to negative postgame abnormal returns. Our evidence may have important implications for firms’ investment decisions and corporate control transactions.
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