Limited attention and stock price drift following earnings announcements and 10-K filings
Purpose –This study aims to examine whether limited attention leads to the market underreaction to earnings announcement and 10-K filings. Design/methodology/approach–This is an empirical study involving statistical analysis of a large sample of data, obtained from Compustat, CRSP and Xignite Inc. Both portfolio analysis and multivariate regressions are used in hypotheses testing. Findings–The following key findings are presented in the paper. First, we show that among large firms, investors under-react more to the information contained in 10-K filings than earnings announcements. Second, underreaction to earnings announcements tends to be stronger for small firms than large firms. Third, we find that companies report their earnings and 10-Ks earlier when there is a higher demand for such information, and document a negative relationship between the degree of underreaction and the timeliness of such information release. Finally, we show that the recent ruling by SEC to accelerate 10-K filing has little impact on the degree of investors' underreaction to 10-K information. Research limitations/implications–The findings of this study suggest that investors' failure to devote enough attention to an economic event leads to underreaction, and the degree of underreaction is negatively correlated with the amount of investor attention. Practical implications–Investors need to periodically reassess the informational contents of economic events, and allocate their attention accordingly, in order to avoid underreaction. Originality/value–This study analyzes and the roles of limited attention in determining the degree of investor underreaction to earnings announcement and 10-K filings. The comparison of the two related but distinct financial reporting events yields interesting insights.
Volume (Year): 1 (2011)
Issue (Month): 4 (August)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=cfri Email:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chordia, Tarun & Shivakumar, Lakshmanan, 2006. "Earnings and price momentum," Journal of Financial Economics, Elsevier, vol. 80(3), pages 627-656, June.
- Foster, George, 1981. "Intra-industry information transfers associated with earnings releases," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 201-232, December.
- Hirshleifer, David, 2001.
"Investor Psychology and Asset Pricing,"
5300, University Library of Munich, Germany.
- Kewei Hou, 2007. "Industry Information Diffusion and the Lead-lag Effect in Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1113-1138.
- Alon Brav & J.B. Heaton, 2002. "Competing Theories of Financial Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 575-606, March.
- Ganapathi Narayanamoorthy, 2006. "Conservatism and Cross-Sectional Variation in the Post-Earnings Announcement Drift," Journal of Accounting Research, Wiley Blackwell, vol. 44(4), pages 763-789, 09.
- Sadka, Ronnie, 2006. "Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk," Journal of Financial Economics, Elsevier, vol. 80(2), pages 309-349, May.
- Mary E. Barth & Greg Clinch & Toshi Shibano, 2003. "Market Effects of Recognition and Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 41(4), pages 581-609, 09.
- Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
- Harrison Hong & Terence Lim & Jeremy C. Stein, 1998.
"Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies,"
NBER Working Papers
6553, National Bureau of Economic Research, Inc.
- Harrison Hong & Terence Lim & Jeremy C. Stein, 2000. "Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies," Journal of Finance, American Finance Association, vol. 55(1), pages 265-295, 02.
- Jacob Thomas & Frank Zhang, 2008. "Overreaction to Intra-industry Information Transfers?," Journal of Accounting Research, Wiley Blackwell, vol. 46(4), pages 909-940, 09.
- Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-30, November.
- David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, 08.
- Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, vol. 82(1), pages 103-133, October.
When requesting a correction, please mention this item's handle: RePEc:eme:cfripp:v:1:y:2011:i:4:p:358-387. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)
If references are entirely missing, you can add them using this form.