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Attention-driven reaction to extreme earnings surprises

Author

Listed:
  • Reyes, Tomas
  • Batista, Julian A.
  • Chacon, Alvaro
  • Martinez, Diego
  • Kausel, Edgar E.

Abstract

We investigate the relationship between investor attention and stock returns in the context of extreme earnings surprises. We propose a novel mechanism that describes this interaction: high attention to very positive and very negative earnings news results in faster incorporation of information into stock prices, an overreaction effect, and a subsequent partial reversal. We test this mechanism using post-announcement abnormal returns and measure investor attention using internet search volume. We confirm that abnormal attention to earnings announcements is positively related to post-announcement abnormal returns when earnings surprises are very positive and negatively related when earnings surprises are very negative. More importantly, we argue that investors exhibit attention-driven overreactions to these extreme earnings surprises since the initial effects of abnormal attention on abnormal returns are subsequently partially reversed.

Suggested Citation

  • Reyes, Tomas & Batista, Julian A. & Chacon, Alvaro & Martinez, Diego & Kausel, Edgar E., 2023. "Attention-driven reaction to extreme earnings surprises," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 230-248.
    • Handle: RePEc:eee:quaeco:v:92:y:2023:i:c:p:230-248
    DOI: 10.1016/j.qref.2023.10.003
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