IDEAS home Printed from https://ideas.repec.org/a/bla/joares/v48y2010i2p289-334.html
   My bibliography  Save this article

Aggregate Market Reaction to Earnings Announcements

Author

Listed:
  • WILLIAM M. CREADY
  • UMIT G. GURUN

Abstract

This analysis identifies a distinct immediate announcement period negative relation between earnings announcement surprises and aggregate market returns. Such a relation implies that market participants use earnings information in forming expectations about expected aggregate discount rates and, specifically, that good earnings news is associated with a positive shock to required returns. Consistent with this interpretation we find that Treasury bond rates and implied future inflation expectations respond directly to earnings news. We also find some evidence that the negative relation between earnings news and market return persists beyond the immediate announcement period, suggesting that market participants do not immediately fully impound these future market return implications of aggregate earnings news.

Suggested Citation

  • William M. Cready & Umit G. Gurun, 2010. "Aggregate Market Reaction to Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 289-334, May.
    • Handle: RePEc:bla:joares:v:48:y:2010:i:2:p:289-334
    DOI: 10.1111/j.1475-679X.2010.00368.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1475-679X.2010.00368.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1475-679X.2010.00368.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Owen Lamont, 1998. "Earnings and Expected Returns," Journal of Finance, American Finance Association, vol. 53(5), pages 1563-1587, October.
    2. Yeung Lewis Chan & Leonid Kogan, 2002. "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1255-1285, December.
    3. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-676, July.
    4. Beaver, Wh, 1968. "Information Content Of Annual Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 6, pages 67-92.
    5. Anilowski, Carol & Feng, Mei & Skinner, Douglas J., 2007. "Does earnings guidance affect market returns? The nature and information content of aggregate earnings guidance," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 36-63, September.
    6. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    7. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    8. Kothari, S.P. & Lewellen, Jonathan & Warner, Jerold B., 2006. "Stock returns, aggregate earnings surprises, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 79(3), pages 537-568, March.
    9. John H. Boyd & Jian Hu & Ravi Jagannathan, 2005. "The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks," Journal of Finance, American Finance Association, vol. 60(2), pages 649-672, April.
    10. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    11. Ball, R & Brown, P, 1968. "Empirical Evaluation Of Accounting Income Numbers," Journal of Accounting Research, Wiley Blackwell, vol. 6(2), pages 159-178.
    12. Baginski, Sp, 1987. "Intraindustry Information Transfers Associated With Management Forecasts Of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 25(2), pages 196-216.
    13. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    14. Sadka, Gil & Sadka, Ronnie, 2009. "Predictability and the earnings-returns relation," Journal of Financial Economics, Elsevier, vol. 94(1), pages 87-106, October.
    15. Tyler Shumway & Vincent A. Warther, 1999. "The Delisting Bias in CRSP's Nasdaq Data and Its Implications for the Size Effect," Journal of Finance, American Finance Association, vol. 54(6), pages 2361-2379, December.
    16. Fisher, Irving, 1907. "The Rate of Interest," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number fisher1907.
    17. Hirshleifer, David & Hou, Kewei & Teoh, Siew Hong, 2009. "Accruals, cash flows, and aggregate stock returns," Journal of Financial Economics, Elsevier, vol. 91(3), pages 389-406, March.
    18. Penman, Stephen H., 1987. "The distribution of earnings news over time and seasonalities in aggregate stock returns," Journal of Financial Economics, Elsevier, vol. 18(2), pages 199-228, June.
    19. Ray Ball & Gil Sadka & Ronnie Sadka, 2009. "Aggregate Earnings and Asset Prices," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1097-1133, December.
    20. K. J. Martijn Cremers, 2002. "Stock Return Predictability: A Bayesian Model Selection Perspective," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1223-1249.
    21. Lakshmanan Shivakumar, 2010. "Discussion of Aggregate Market Reaction to Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 335-342, May.
    22. Shivakumar, Lakshmanan, 2007. "Aggregate earnings, stock market returns and macroeconomic activity: A discussion of `does earnings guidance affect market returns? The nature and information content of aggregate earnings guidance'," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 64-73, September.
    23. Long Chen & Xinlei Zhao, 2009. "Return Decomposition," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5213-5249, December.
    24. Mark J. Flannery & Aris A. Protopapadakis, 2002. "Macroeconomic Factors Do Influence Aggregate Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 751-782.
    25. Gil Sadka, 2007. "Understanding Stock Price Volatility: The Role of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 45(1), pages 199-228, March.
    26. Mark R. Greer, 2006. "Can the Wall Street Journal’s Economic Forecasters Predict Turning Points?," Journal of Economic Issues, Taylor & Francis Journals, vol. 40(3), pages 808-812, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yunhao Chen & Xiaoquan Jiang & Bong-Soo Lee, 2015. "Long-Term Evidence on the Effect of Aggregate Earnings on Prices," Financial Management, Financial Management Association International, vol. 44(2), pages 323-351, June.
    2. Ball, Ray & Sadka, Gil, 2015. "Aggregate earnings and why they matter," Journal of Accounting Literature, Elsevier, vol. 34(C), pages 39-57.
    3. Zolotoy, Leon & Frederickson, James R. & Lyon, John D., 2017. "Aggregate earnings and stock market returns: The good, the bad, and the state-dependent," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 157-175.
    4. Maria Ogneva, 2013. "Discussion of What Do Management Earnings Forecasts Convey About the Macroeconomy?," Journal of Accounting Research, Wiley Blackwell, vol. 51(2), pages 267-279, May.
    5. Choi, Jung Ho & Kalay, Alon & Sadka, Gil, 2016. "Earnings news, expected earnings, and aggregate stock returns," Journal of Financial Markets, Elsevier, vol. 29(C), pages 110-143.
    6. Sadka, Gil & Sadka, Ronnie, 2009. "Predictability and the earnings-returns relation," Journal of Financial Economics, Elsevier, vol. 94(1), pages 87-106, October.
    7. Jorgensen, Bjorn & Li, Jing & Sadka, Gil, 2012. "Earnings dispersion and aggregate stock returns," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 1-20.
    8. Yuto Yoshinaga, 2016. "Market-Wide Cost of Capital Impacts on the Aggregate Earnings-Returns Relation: Evidence from Japan," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 6, pages 95-122, December.
    9. Panos Patatoukas & Hongjun Yan, 2009. "The Impact of Earnings Surprises on Stock Returns: Theory and Evidence," Yale School of Management Working Papers amz2517, Yale School of Management.
    10. Xanthi Gkougkousi, 2014. "Aggregate Earnings and Corporate Bond Markets," Journal of Accounting Research, Wiley Blackwell, vol. 52(1), pages 75-106, March.
    11. Lakshmanan Shivakumar, 2010. "Discussion of Aggregate Market Reaction to Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 335-342, May.
    12. Safdar, Irfan, 2018. "The information content of aggregate profitability," The British Accounting Review, Elsevier, vol. 50(5), pages 497-515.
    13. Ray Ball & Gil Sadka & Ronnie Sadka, 2009. "Aggregate Earnings and Asset Prices," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1097-1133, December.
    14. Hui Guo & Xiaowen Jiang, 2011. "Accruals and the Conditional Equity Premium," Journal of Accounting Research, Wiley Blackwell, vol. 49(1), pages 187-221, March.
    15. Samuel B. Bonsall & Zahn Bozanic & Paul E.. Fischer, 2013. "What Do Management Earnings Forecasts Convey About the Macroeconomy?," Journal of Accounting Research, Wiley Blackwell, vol. 51(2), pages 225-266, May.
    16. Vinay Goyal & Subrata K. Mitra, 2022. "Is the asymmetric impact of aggregate revenue and aggregate earnings on the stock index in accordance with the prospect theory?," International Review of Finance, International Review of Finance Ltd., vol. 22(1), pages 200-222, March.
    17. Jaewoo Kim & Bryce Schonberger & Charles Wasley & Hunter Land, 2020. "Intertemporal variation in the information content of aggregate earnings and its effect on the aggregate earnings-return relation," Review of Accounting Studies, Springer, vol. 25(4), pages 1410-1443, December.
    18. John S. Howe & Emre Unlu & Xuemin (Sterling) Yan, 2009. "The Predictive Content of Aggregate Analyst Recommendations," Journal of Accounting Research, Wiley Blackwell, vol. 47(3), pages 799-821, June.
    19. Maio, Paulo & Philip, Dennis, 2015. "Macro variables and the components of stock returns," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 287-308.
    20. Atif Ellahie, 2021. "Earnings beta," Review of Accounting Studies, Springer, vol. 26(1), pages 81-122, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:joares:v:48:y:2010:i:2:p:289-334. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.