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Sell on the news: Differences of opinion, short-sales constraints, and returns around earnings announcements

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  • Berkman, Henk
  • Dimitrov, Valentin
  • Jain, Prem C.
  • Koch, Paul D.
  • Tice, Sheri
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    Abstract

    Miller [1977. Risk, uncertainty, and divergence of opinion. Journal of Finance 32, 1151-1168] hypothesizes that prices of stocks subject to high differences of opinion and short-sales constraints are biased upward. We expect earnings announcements to reduce differences of opinion among investors, and consequently, these announcements should reduce overvaluation. Using five distinct proxies for differences of opinion, we find that high differences of opinion stocks earn significantly lower returns around earnings announcements than low differences of opinion stocks. In addition, the returns on high differences of opinion stocks are more negative within the subsample of stocks that are most difficult for investors to sell short. These results are robust when we control for the size effect and the market-to-book effect and when we examine alternative explanations such as financial leverage, earnings announcement premium, post-earnings announcement drift, return momentum, and potential biases in analysts' forecasts. Also consistent with Miller's theory, we find that stocks subject to high differences of opinion and more binding short-sales constraints have a price run-up just prior to earnings announcements that is followed by an even larger decline after the announcements.

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    File URL: http://www.sciencedirect.com/science/article/B6VBX-4VP4TPH-1/2/a786efd21ef7a3d7c50329fbee409958
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 92 (2009)
    Issue (Month): 3 (June)
    Pages: 376-399

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    Handle: RePEc:eee:jfinec:v:92:y:2009:i:3:p:376-399

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Differences of opinion Earnings announcements Institutional ownership Limits to arbitrage Market efficiency Short-sales constraints;

    References

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    Cited by:
    1. Blau, Benjamin M. & Van Ness, Robert A. & Warr, Richard S., 2012. "Short selling of ADRs and foreign market short-sale constraints," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 886-897.
    2. Fellner, Gerlinde & Theissen, Erik, 2011. "Short sale constraints, divergence of opinion and asset value: Evidence from the laboratory," CFR Working Papers 11-03, University of Cologne, Centre for Financial Research (CFR).
    3. Gharghori, Philip & See, Quin & Veeraraghavan, Madhu, 2011. "Difference of opinion and the cross-section of equity returns: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 19(4), pages 435-446, September.
    4. Zhang, Qi & Cai, Charlie X. & Keasey, Kevin, 2013. "Market reaction to earnings news: A unified test of information risk and transaction costs," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 251-266.
    5. Fang, Vivian W. & Noe, Thomas H. & Tice, Sheri, 2009. "Stock market liquidity and firm value," Journal of Financial Economics, Elsevier, vol. 94(1), pages 150-169, October.

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