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Stockholders’ Unrealized Returns and the Market Reaction to Financial Disclosures

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  • ERIC WEISBROD

Abstract

Using both investor‐ and stock‐level data, I examine the relation between stockholders’ unrealized returns since purchase and the market response to earnings announcements. I demonstrate that stockholders’ unrealized gain/loss position moderates their trading behavior in response to earnings announcements. I also find that this behavior generates a short‐window return underreaction to earnings news. My results are generally consistent with predictions from prospect theory regarding the manner in which stockholders’ unrealized returns moderate their trading response to belief shocks. However, my results also suggest that an emotional component (i.e., regret‐avoidance/pride‐seeking) is necessary to explain the observed investor behavior.

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  • Eric Weisbrod, 2019. "Stockholders’ Unrealized Returns and the Market Reaction to Financial Disclosures," Journal of Finance, American Finance Association, vol. 74(2), pages 899-942, April.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:2:p:899-942
    DOI: 10.1111/jofi.12743
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    Cited by:

    1. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    2. Yue Liu & Hao Dong & Pierre Failler, 2019. "The Oil Market Reactions to OPEC’s Announcements," Energies, MDPI, vol. 12(17), pages 1-15, August.
    3. Dimmock, Stephen G. & Feng, Fan & Zhang, Huai, 2023. "Mutual funds' capital gains lock-in and earnings management," Journal of Corporate Finance, Elsevier, vol. 80(C).

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