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Ambiguity Aversion, Company Size and the Pricing of Earnings Forecasts

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  • Constantinos Antoniou
  • Emilios C. Galariotis
  • Daniel Read

Abstract

Several authors have reported an unconditional size effect in returns around earnings announcements. In this study we show how this finding can be understood as resulting from ambiguity aversion. We hypothesise that analyst forecasts for smaller companies are relatively more ambiguous; hence they are priced pessimistically by ambiguity†averse investors. As the quarter comes to a close and ambiguity gradually subsides, the stock prices of smaller companies rise to correct this pessimism, creating the size effect. Our results support these hypotheses.

Suggested Citation

  • Constantinos Antoniou & Emilios C. Galariotis & Daniel Read, 2014. "Ambiguity Aversion, Company Size and the Pricing of Earnings Forecasts," European Financial Management, European Financial Management Association, vol. 20(3), pages 633-651, June.
    • Handle: RePEc:bla:eufman:v:20:y:2014:i:3:p:633-651
    DOI: 10.1111/j.1468-036X.2012.00651.x
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    Cited by:

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    2. C. Wei Li & Ashish Tiwari & Lin Tong, 2017. "Investment Decisions Under Ambiguity: Evidence from Mutual Fund Investor Behavior," Management Science, INFORMS, vol. 63(8), pages 2509-2528, August.
    3. Vu, Huong & Alsakka, Rasha & Gwilym, Owain ap, 2015. "The credit signals that matter most for sovereign bond spreads with split rating," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 174-191.

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