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Individual Investor Trading and Return Patterns around Earnings Announcements

Author

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  • RON KANIEL
  • SHUMING LIU
  • GIDEON SAAR
  • SHERIDAN TITMAN

Abstract

This paper documents evidence consistent with informed trading by individual investors around earnings announcements using a unique dataset of NYSE stocks. We show that intense aggregate individual investor buying (selling) predicts large positive (negative) abnormal returns on and after earnings announcement dates. We decompose the abnormal returns into a component that is attributed to risk-averse liquidity provision and a component that is attributed to private information or skill, and show that about half of the abnormal returns in the three months following the event can be attributed to private information. We also examine the behavior of individuals after the earnings announcement and find that they trade in the opposite direction to both pre-event returns (i.e., exhibit "contrarian" behavior) and the earnings surprise (i.e., exhibit "news-contrarian" behavior). The latter behavior, which could be consistent with profit-taking, has the potential to slow down the adjustment of prices to earnings news and contribute to the post-earnings announcement drift.
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Suggested Citation

  • Ron Kaniel & Shuming Liu & Gideon Saar & Sheridan Titman, 2012. "Individual Investor Trading and Return Patterns around Earnings Announcements," Journal of Finance, American Finance Association, vol. 67(2), pages 639-680, April.
    • Handle: RePEc:bla:jfinan:v:67:y:2012:i:2:p:639-680
    DOI: j.1540-6261.2012.01727.x
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    File URL: http://hdl.handle.net/10.1111/j.1540-6261.2012.01727.x
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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