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Driven to Distraction: Extraneous Events and Underreaction to Earnings News

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  • DAVID HIRSHLEIFER
  • SONYA SEONGYEON LIM
  • SIEW HONG TEOH

Abstract

Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The "investor distraction hypothesis" holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm's earnings surprise is much weaker, and post-announcement drift much stronger, when a greater number of same-day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry-unrelated news and large earnings surprises have a stronger distracting effect. Copyright (c) 2009 the American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 64 (2009)
Issue (Month): 5 (October)
Pages: 2289-2325

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Handle: RePEc:bla:jfinan:v:64:y:2009:i:5:p:2289-2325

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Cited by:
  1. Riccardo Ferretti & Francesco Pattarin, 2008. "Is public information really public? The role of newspapers," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 08013, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  2. Stefano DellaVigna & Joshua M. Pollet, 2009. "Capital Budgeting vs. Market Timing: An Evaluation Using Demographics," NBER Working Papers 15184, National Bureau of Economic Research, Inc.
  3. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-72, June.
  4. Gerald Eisenkopf & Tim Friehe, 2012. "Stop Watching and Start Listening! The Impact of Coaching and Peer Observation in tournaments," Working Paper Series of the Department of Economics, University of Konstanz 2012-10, Department of Economics, University of Konstanz.
  5. Palomino, F.A. & Renneboog, L.D.R. & Zhang, C., 2008. "Information Salience, Investor Sentiment, and Stock Returns: The Case of British Soccer Betting," Discussion Paper 2008-99, Tilburg University, Center for Economic Research.
  6. Da, Zhi & Warachka, Mitch, 2011. "The disparity between long-term and short-term forecasted earnings growth," Journal of Financial Economics, Elsevier, vol. 100(2), pages 424-442, May.
  7. Lim, Kian-Ping & Kim, Jae H., 2011. "Trade openness and the informational efficiency of emerging stock markets," Economic Modelling, Elsevier, vol. 28(5), pages 2228-2238, September.
  8. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
  9. Ginglinger, Edith & Degeorge, François & Boulland, Romain, . "Targeted Communication and Investor Attention," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/9553, Université Paris-Dauphine.
  10. Sofía B. Ramos & Helena Veiga & Pedro Latoeiro, 2013. "Predictability of stock market activity using Google search queries," Statistics and Econometrics Working Papers ws130605, Universidad Carlos III, Departamento de Estadística y Econometría.
  11. Loh, Roger, 2008. "Investor Attention and the Underreaction to Stock Recommendations," Working Paper Series 2008-2, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  12. Turan G. Bali & Lin Peng & Yannan Shen & Yi Tang, 2013. "Liquidity Shocks and Stock Market Reactions," Koç University-TUSIAD Economic Research Forum Working Papers 1304, Koc University-TUSIAD Economic Research Forum.

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