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Do record earnings affect market reactions to earnings news?

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  • Juwon Jang

    (University of Massachusetts Lowell)

  • Eunju Lee

    (University of Massachusetts Lowell)

Abstract

We find evidence that a firm’s record earnings influence market response to earnings news. Our results show that the proximity of the firm’s earnings to its record earnings leads to investors’ underreaction following earnings announcements, exacerbating post-earnings-announcement drift. Such biased behavior is more pronounced in low-growth firms and firms with low institutional ownership. Meanwhile, analysts are not subject to this anchoring bias when a firm’s earnings are close to its record earnings. Overall, we find that a firm’s record earnings play an important role as an anchor when market participants evaluate the firm’s earnings news.

Suggested Citation

  • Juwon Jang & Eunju Lee, 2021. "Do record earnings affect market reactions to earnings news?," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1259-1287, May.
    • Handle: RePEc:kap:rqfnac:v:56:y:2021:i:4:d:10.1007_s11156-020-00927-4
    DOI: 10.1007/s11156-020-00927-4
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    More about this item

    Keywords

    Record earnings; Anchoring bias; Post-earnings-announcement drift; Analyst forecast revisions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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