Earnings announcement return extrapolation

Ertan, A, Karolyi, S A, Kelly, P W and Stoumbos, R (2020) Earnings announcement return extrapolation. Review of Accounting Studies. ISSN 1380-6653 (Accepted)

Abstract

We propose that extrapolative beliefs about earnings announcement (EA) returns may contribute to our understanding of EA return patterns. We construct a theoretically-motivated measure of extrapolative investors’ expectations based on a stock’s recent history of EA returns. We then show that this measure explains cross-sectional variation in stock returns and investor behavior around EAs. Stocks expected to have high EA returns according to our measure experience predictable increases in prices before EAs and predictable decreases afterwards. These patterns are economically significant: investors that buy (sell) a portfolio that is long firms with high recent EA returns and short firms with low recent EA returns in the pre-EA (post-EA) period earn daily five-factor abnormal returns of 16.1 bps (18.3 bps). Using individual investor trades data and a measure of institutional trading, we find that individual and institutional investors are more likely to purchase stocks with high recent EA returns, consistent with at least a subset of investors forming extrapolative beliefs about EA returns.

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Item Type: Article
Subject Areas: Accounting
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© 2020 Springer Nature Switzerland AG

This is a post-peer-review, pre-copyedit version of an article published in Review of Accounting Studies. The final authenticated version is available online at: (awaiting DOI to be confirmed at point of first online publication).

Date Deposited: 05 Nov 2020 15:03
Date of first compliant deposit: 04 Nov 2020
Subjects: E > Expectation
Last Modified: 06 Nov 2020 01:54
URI: https://lbsresearch.london.edu/id/eprint/1540
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