90 research outputs found
The High-Volume Return Premium and Post-Earnings Announcement Drift
This paper investigates the relationship among trading volume around earnings announcements, earnings forecast errors, and subsequent returns. Prior research finds a positive relation between earnings announcement period trading volume and subsequent returns (the high-volume return
premium) and between earnings forecast errors and subsequent returns (post-earnings
announcement drift). We find that for a sample of firms followed by analysts these effects are complementary, i.e., each retains incremental ability to predict post-earnings announcement returns. Prior research provides two competing explanations for the high-volume return premium: changes in firm visibility versus differences in risk. We provide evidence that seems to rule out
risk-based explanations while supporting the visibility hypothesis
Naive Investors, Earnings Announcements, and Stock Price Movements
This paper addresses the issue of whether investors with “naïve” earnings expectations (i.e., earnings forecasts that are systematically less accurate than other publicly available predictions) have sufficient market power to affect common stock prices. The results clearly indicate that when security analysts predict quarterly earnings increases (decreases), from the same fiscal quarter of the prior year, that the abnormal return around the upcoming earnings announcement tends to be positive. When the data are formed into 50 portfolios, about 66% of the abnormal return variation around earnings announcements is explained by the predicted earnings change. This is surprising since the forecasts used are dated from one to thirteen weeks before the earnings announcement
Naive Investors, Earnings Announcements, and Stock Price Movements
This paper addresses the issue of whether investors with “naïve” earnings expectations (i.e., earnings forecasts that are systematically less accurate than other publicly available predictions) have sufficient market power to affect common stock prices. The results clearly indicate that when security analysts predict quarterly earnings increases (decreases), from the same fiscal quarter of the prior year, that the abnormal return around the upcoming earnings announcement tends to be positive. When the data are formed into 50 portfolios, about 66% of the abnormal return variation around earnings announcements is explained by the predicted earnings change. This is surprising since the forecasts used are dated from one to thirteen weeks before the earnings announcement
Who, if Anyone, Reacts to Accrual Information?
We confirm and extend prior research that suggests accrual levels predict future returns, even after controlling for earnings surprise. We then document abnormal buying behavior around 10-K/Q filing dates that correlates with accrual level. Specifically, we extend Collins and Hribar (2000) by showing that the accrual anomaly persists for a sample of firms followed by analysts after controlling for analyst earnings forecast errors and using exact 10-K/Q filing dates. We then show that large traders, those who
initiate trades of at least 5,000 shares, tend to trade in the correct direction in response to accrual information released in SEC filings after preliminary earnings. This tendency is limited, however, to cases
where earnings conveyed favorable news initially. Investors who use accrual information apparently ignore stocks whose earnings convey unfavorable news or believe that accrual level is not informative for
these firms. We also provide some evidence that the smallest traders react to accrual information, but in the wrong direction
Option Listing, Information Production and the Stock Price Response to Earnings Announcements
This paper addresses the issue of whether investors produce more information on firms that have listed stock options than on similar firms that do not have options and, if so, whether this additional information translates into a smaller stock-price reaction to releases of public information such as earnings announcements. After correcting for factors previously found to explain changes in two indicators of investor interest, analyst attention and institutional ownership, we find that firms with listed options exhibit significantly higher average levels of each of these variables than firms without listed options. Prior results regarding this issue are limited and contradictory. We also find, contrary to previous research, that this additional information production does not lead to a smaller price reaction to earnings announcements. The remainder of the introduction discusses prior research as well as the motivation for this study
Earnings expectations and investor clienteles
Abstract: Prior research suggests that the earnings expectations of some investors are systematically biased toward seasonal random walk (SRW) predictions. We provide clear and direct evidence that the net buying activity of small (large) traders around earnings announcements is significantly positively associated with SRW (analyst) forecast errors. Further, the interpretations of earnings news by the smallest and largest investors appear to be completely unrelated. Finally, small trades at the time of earnings announcements run counter to stock-price movements suggesting that small traders may impede stock prices from reflecting earnings-related information and may, therefore, play a role in post-earnings-announcement drift. Earnings Expectations and Investor Clienteles Abstract: Prior research suggests that the earnings expectations of some investors are systematically biased toward seasonal random walk (SRW) predictions. We provide clear and direct evidence that the net buying activity of small (large) traders around earnings announcements is significantly positively associated with SRW (analyst) forecast errors. Further, the interpretations of earnings news by the smallest and largest investors appear to be completely unrelated. Finally, small trades at the time of earnings announcements run counter to stock-price movements suggesting that small traders may impede stock prices from reflecting earnings-related information and may, therefore, play a role in post-earnings-announcement drift
New Evidence on Stock Price Effects Associated with Charges in the S&P 500 Index
Since October 1989, Standard and Poor’s has (when possible) announced changes in the composition of the S&P 500 index one week in advance. Because index funds hold S&P 500 stocks to minimize tracking error, index composition changes since this date provide an opportunity to examine the market reaction to an anticipated change in the demand for a stock. Using post-October-1989 data, we document significantly positive (negative) post-announcement abnormal returns that are only partially reversed following additions (deletions). These results indicate the existence of temporary price pressure and downward-sloping log-run demand curves for stocks and represent a violation of market efficiency
Earnings Surprises and the Options Market
Numerous articles over the past few decades have documented a consistent relationship between earnings surprises and subsequent stock price performance. [See, for example, Ball and Brown (1968), Rendleman, Jones, and Latane (1982), Foster, Olsen, and Shevlin (1984), and Bernard and Thomas (1989).] Specifically when firms announce quarterly earnings figures that are higher (lower) than market expectations, as proxied by either mechanical time-series models or commercially available analysts’ forecasts, the stock price performance following the announcement tends to be abnormally good (bad). This phenomenon is referred to as post-earnings-announcement drift or the standardized unexpected earnings effect, SUE for short
Evidence of Informed Trading Prior to Earnings Announcements
This study examines transactions in stocks during the thirty trading days prior to earnings announcements. Using two methodologies, we find evidence of informed trading for initiators of large transactions (presumably institutions) but not for initiators of small transactions (presumably individuals). Specifically, we find that, relative to a control period, initiators of large transactions tend to buy (sell) stocks prior to earnings announcements that exceed (fall short of) analyst’ forecasts. In addition, the fraction of total stock price movement that occurs on large transactions is substantially higher during the pre-announcement period than during the control period. Results of both tests suggest, contrary to previous research, that some large traders have and use superior private information prior to large earnings surprises
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