Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance PDF Download
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Author: Jonathan Lewellen
Publisher:
ISBN:
Category :
Languages : en
Pages : 42
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Book Description
We study the stock market reaction to aggregate earnings news. Previous research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. We find that the relation between returns and earnings is substantially different in aggregate data. First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns are negatively correlated with concurrent earnings; over the last 30 years, stock prices increased 6.5% in quarters with negative earnings growth and only 1.9% otherwise. This finding suggests that earnings and discount rates move together over time, and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns.
Author: Jonathan Lewellen
Publisher:
ISBN:
Category :
Languages : en
Pages : 42
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Book Description
We study the stock market reaction to aggregate earnings news. Previous research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. We find that the relation between returns and earnings is substantially different in aggregate data. First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns are negatively correlated with concurrent earnings; over the last 30 years, stock prices increased 6.5% in quarters with negative earnings growth and only 1.9% otherwise. This finding suggests that earnings and discount rates move together over time, and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns.
Author: S. P. Kothari
Publisher:
ISBN:
Category :
Languages : en
Pages : 68
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Book Description
We study the stock market reaction to aggregate earnings news. Previous research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. We find that the relation between returns and earnings is substantially different in aggregate data. First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns are negatively correlated with concurrent earnings; over the last 30 years, stock prices increased 6.5% in quarters with negative earnings growth and only 1.9% otherwise. This finding suggests that earnings and discount rates move together over time, and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns. JEL Classification: G12, G14, M41.
Author: Narayan Rao Sapar
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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Book Description
This paper studies the stock market's reaction to aggregate earnings news and better understand the relationship among earnings, stock prices, and discount rates Prior research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. Our analysis shows that the market's reaction to aggregate earnings is quite similar to its reaction to firm earnings. Taking all of the results together, we find some evidence that prices react slowly to aggregate earnings news. The evidence supports the recent behavioral finance theories which explain post-earnings announcement drift in firm level are also applicable at the aggregate level. The results also provide new evidence on the connections among prices, earnings, and discount rates. The autocorrelations among earnings suggest that relationship between the current earnings over its previous earnings is predominantly negative and past earnings have little power to predict future earnings. The analysis also shows that earnings are correlated with changes in proxies for discount rates. However, the limited data set available could bound the significance of the results.
Author: Lindsey A. Gallo
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
This paper examines whether the negative association between aggregate earnings and returns is explained by the monetary policy news in aggregate earnings. Using Federal funds futures data to construct a measure of policy news, we find that aggregate earnings convey information about the Fed's policy actions. Additionally, the negative aggregate earnings-returns association is muted when we control for policy surprises. This result is more pronounced in periods with negative policy surprises, which tend to trigger a more significant market reaction. Taken together, these results suggest that aggregate earnings convey policy news and the market reacts negatively to policy surprises, which drives the negative aggregate earnings-returns association.
Author: Jeffrey T. Doyle
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We investigate the stock returns subsequent to quarterly earnings surprises, where the benchmark for an earnings surprise is the consensus analyst forecast. By defining the surprise relative to an analyst forecast rather than a time-series model of expected earnings, we document returns subsequent to earnings announcements that are much larger, persist for much longer, and are more heavily concentrated in the long portion of the hedge portfolio than shown in previous studies. We show that our results hold after controlling for risk and previously documented anomalies, and are positive for every quarter between 1988 and 2000. Finally, we explore the financial results and information environment of firms with extreme earnings surprises and find that they tend to be 'neglected' stocks with relatively high book-to-market ratios, low analyst coverage, and high analyst forecast dispersion. In the three subsequent years, firms with extreme positive earnings surprises tend to have persistent earnings surprises in the same direction, strong growth in cash flows and earnings, and large increases in analyst coverage, relative to firms with extreme negative earnings surprises. We also show that the returns to the earnings surprise strategy are highest in the quartile of firms where transaction costs are highest and institutional investor interest is lowest, consistent with the idea that market inefficiencies are more prevalent when frictions make it difficult for large, sophisticated investors to exploit the inefficiencies.
Author: Jeffrey T. Doyle
Publisher:
ISBN:
Category :
Languages : en
Pages : 41
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Book Description
We investigate the stock returns subsequent to large quarterly earnings surprises, where the benchmark for an earnings surprise is the consensus analyst forecast. By defining the surprise relative to an analyst forecast rather than a time-series model of expected earnings, we document returns subsequent to earnings announcements that are much larger, persist for much longer, and are more heavily concentrated in the long portion of the hedge portfolio than shown in previous studies. We show that our results hold after controlling for risk and previously documented anomalies, and are positive for every quarter between 1988 and 2000. Finally, we explore the financial results and information environment of firms with extreme earnings surprises and find that they tend to be quot;neglectedquot; stocks with relatively high book to market ratios, low analyst coverage, and high analyst forecast dispersion. In the three subsequent years, firms with extreme positive earnings surprises tend to have persistent earnings surprises in the same direction, strong growth in cash flows and earnings, and large increases in analyst coverage, relative to firms with extreme negative earnings surprises.
Author: Michael Kaestner
Publisher:
ISBN:
Category :
Languages : en
Pages : 28
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Book Description
Behavioral Finance aims to explain empirical anomalies by introducing investor psychology as a determinant of asset pricing. Two kinds of anomalies, namely underreaction and overreaction, have been established by an impressive record of empirical work. While underreaction defines a slow adjustment of prices to corporate events or announcements, overreaction deals with extreme stock price reactions to previous information or past performance.This study investigates current and past earnings surprises for listed US companies over the period 1983-1999. It provides evidence that investors exhibit long-term overreaction to past, highly unexpected, earnings surprises. Investors tend to overestimate (underestimate) future earnings after extreme positive (negative) earnings surprises. As, on average, these extreme past surprises are not confirmed by subsequent earnings figures, they are followed by a correction of the initial overreaction at the date of the subsequent earnings announcement. Moreover, the longer the similar earnings surprise series, the higher the subsequent correction, suggesting that representativeness may cause this overreaction phenomenon.
Author: Hersh Shefrin
Publisher: College Ie Overruns
ISBN: 9781259254864
Category : Corporations
Languages : en
Pages : 300
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Book Description
Author: Devin M. Shanthikumar
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
Several analytical models explain post-earnings-announcement drift, momentum and mean-reversion by making assumptions about investor behavior. They posit that investors react more strongly as a series of similar earnings surprises continues. Related literature suggests that behavior should vary systematically with investor sophistication. This paper tests these claims by analyzing whether traders on the NYSE exhibit increasing reactions to a series of similar earnings surprises, and whether their behavior varies with trade size, a proxy for sophistication. Results show that smaller traders exhibit an increasing reaction, with significant increases between the first, second, and third surprise. The pattern is weaker for larger trade-size groups, disappearing for the largest. Controls for prior returns show that small traders generally act as contrarians and large traders as momentum traders, strengthening the results. Future drift is weaker for each subsequent surprise in a series, suggesting that increasing reactions are not attempts to capitalize on increasing returns.
Author: Mathias Külpmann
Publisher: Springer Science & Business Media
ISBN: 9783540140078
Category : Business & Economics
Languages : en
Pages : 268
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Book Description
Mathias Külpmann presents a framework to evaluate whether the stock market is in line with underlying fundamentals. The new and revised edition offers an up to date introduction to the controversy between rational asset pricing and behavioural finance. Empirical evidence of stock market overreaction are investigated within the paradigms of rational asset pricing and behavioural finance. Although this monograph will not promise the reader to become a millionaire, it offers a road to obtain a deeper understanding of the forces which drive stock returns. It should be of interest to anyone interested in what drives performance in the stock market.
