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How Naïve Is the Market’s Use of Firm‐Specific Earnings Information?

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  • Richard R. Mendenhall

Abstract

Recent studies suggest the apparent delay in the stock‐price response to earnings announcements (i.e., post‐earnings announcement drift) is caused by investors who underestimate the autocorrelation of seasonally‐differenced earnings (persistence). I present results that suggest: (1) a firm’s future persistence is predictable on the basis of its past persistence; (2) the immediate stock‐price response to earnings is positively related to historical persistence; (3) post‐earnings‐announcement drift is independent of historical persistence; and (4) consistent with (2) and (3), the difference between a firm’s current observed persistence and that implied in stock prices is independent of its historical persistence. These results extend prior research by demonstrating that investors are aware not only that seasonally‐differenced earnings are autocorrelated, but that investors recognize firm‐specific differences in the magnitude of the autocorrelation.

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  • Richard R. Mendenhall, 2002. "How Naïve Is the Market’s Use of Firm‐Specific Earnings Information?," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 841-863, June.
    • Handle: RePEc:bla:joares:v:40:y:2002:i:3:p:841-863
    DOI: 10.1111/1475-679X.00073
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    Cited by:

    1. Renê Coppe Pimentel & Andson Braga de Aguiar, 2012. "Persistence of quarterly earnings: an empirical investigation in Brazil," Brazilian Business Review, Fucape Business School, vol. 9(Special I), pages 38-54, March.
    2. Fink, Josef, 2021. "A review of the Post-Earnings-Announcement Drift," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    3. Chudek, Mark & Truong, Cameron & Veeraraghavan, Madhu, 2011. "Is trading on earnings surprises a profitable strategy? Canadian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 832-850.
    4. Josef Fink, 2020. "A Review of the Post-Earnings-Announcement Drift," Working Paper Series, Social and Economic Sciences 2020-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    5. Martineau, Charles, 2021. "Rest in Peace Post-Earnings Announcement Drift," SocArXiv z7k3p, Center for Open Science.

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