Do record earnings affect market reactions to earnings news?

We find evidence that a firm’s record earnings influence market response to earnings news. Our results show that the proximity of the firm’s earnings to its record earnings leads to investors’ underreaction following earnings announcements, exacerbating post-earnings-announcement drift. Such biased...

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Bibliographic Details
Published inReview of quantitative finance and accounting Vol. 56; no. 4; pp. 1259 - 1287
Main Authors Jang, Juwon, Lee, Eunju
Format Journal Article
LanguageEnglish
Published New York Springer US 01.05.2021
Springer Nature B.V
Subjects
Accounting/Auditing
Anchoring
Announcements
Bias
Corporate Finance
Earnings
Earnings announcements
Econometrics
Economics and Finance
Finance
News
Operations Research/Decision Theory
Original Research
Ownership
Proximity
Stock prices
Post-earnings-announcement drift
Record earnings
Anchoring bias
G41
G11
Analyst forecast revisions
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Summary:We find evidence that a firm’s record earnings influence market response to earnings news. Our results show that the proximity of the firm’s earnings to its record earnings leads to investors’ underreaction following earnings announcements, exacerbating post-earnings-announcement drift. Such biased behavior is more pronounced in low-growth firms and firms with low institutional ownership. Meanwhile, analysts are not subject to this anchoring bias when a firm’s earnings are close to its record earnings. Overall, we find that a firm’s record earnings play an important role as an anchor when market participants evaluate the firm’s earnings news.
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ISSN:0924-865X
1573-7179
DOI:10.1007/s11156-020-00927-4