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Trust in Financial Markets: Evidence from Reactions to Earnings News

Author

Listed:
  • Chishen Wei

    (Hong Kong Polytechnic University, Hong Kong)

  • Lei Zhang

    (City University of Hong Kong, Hong Kong)

Abstract

This paper studies the effect of trust on the perceived credibility of earnings news. Using earnings response coefficients, we find that firms located in low-trust regions of the United States experience significantly lower stock price reactions to earnings news. Additional tests indicate that managers can counterbalance investors’ dependence on trust by employing reputable auditors or signaling the quality of their earnings using dividends to improve the perceived credibility of their financial reports. Overall, our findings suggest that trust affects the pricing of earnings news in capital markets.

Suggested Citation

  • Chishen Wei & Lei Zhang, 2023. "Trust in Financial Markets: Evidence from Reactions to Earnings News," Management Science, INFORMS, vol. 69(10), pages 6393-6415, October.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:10:p:6393-6415
    DOI: 10.1287/mnsc.2022.4569
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