Influence of Sales Consistency on Investor's Perception of Future Grow : Evidence from the Information Technology Sector

This thesis examines the influence of representativeness bias on the perception of future growth potential within the technology sector. Taking a sample of all US technology stocks, I found evidence that the representativeness bias is of higher magnitude within the tech sector compared to the overall market. Namely, tech stocks which are characterized by consistent sales growth that is incongruent with underlying fundamentals exhibit higher price reversals. Furthermore, I provide evidence that the Z-Score is a better fundamental differentiator than the F-Score for tech stocks to measure the magnitude of representativeness bias. Next, I found that tech stocks within the highest price-to-sales quantile, on average, outperform stocks in the lowest quantile on a market cap- and equally-weighted basis, suggesting that a simple value investing strategy based on price-to-sales ratio does not yield superior returns. Last but not least, I provide evidence that stocks that have extremely high price-to-sales ratios underperform the overall sector on a three to five year's horizon, but the fundamental ratio has no prediction power over a 1 year horizon.