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Limited attention and the earnings announcement returns of past stock market winners

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  • David Aboody

    (University of California, Los Angeles)

  • Reuven Lehavy

    (University of Michigan)

  • Brett Trueman

    (University of California, Los Angeles)

Abstract

We document that stocks with the strongest prior 12-month returns experience a significant average market-adjusted return of 1.58% during the five trading days before their earnings announcements and a significant average market-adjusted return of −1.86% in the five trading days afterward. These returns remain significant even after accounting for transactions costs. We empirically test a limited attention explanation for these anomalous returns—that stocks with sharp run-ups tend to attract individual investors’ attention and investment dollars, particularly before their earnings announcements. Our analysis suggests that the trading decisions of individual investors are at least partly responsible for the return pattern that we observe.

Suggested Citation

  • David Aboody & Reuven Lehavy & Brett Trueman, 2010. "Limited attention and the earnings announcement returns of past stock market winners," Review of Accounting Studies, Springer, vol. 15(2), pages 317-344, June.
    • Handle: RePEc:spr:reaccs:v:15:y:2010:i:2:d:10.1007_s11142-009-9104-9
    DOI: 10.1007/s11142-009-9104-9
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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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