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Does the market overweight imprecise information? Evidence from customer earnings announcements

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  • C. S. Agnes Cheng

    (The Hong Kong Polytechnic University)

  • John Daniel Eshleman

    (Oklahoma State University)

Abstract

We examine how supplier-firm shareholders respond to the earnings announcements of their major customers to test the moderated confidence hypothesis, which predicts overreaction to imprecise signals. In our setting, the moderated confidence hypothesis predicts that supplier shareholders will overreact to customer earnings news because that news contains imprecise information about the suppliers’ future cash flows. We find evidence that supplier earnings announcement abnormal returns are negatively correlated with supplier abnormal returns at the earlier customers’ earnings announcements, consistent with supplier overreaction. We also find evidence that the overreaction declines with the strength of the economic ties between the supplier and the customer.

Suggested Citation

  • C. S. Agnes Cheng & John Daniel Eshleman, 2014. "Does the market overweight imprecise information? Evidence from customer earnings announcements," Review of Accounting Studies, Springer, vol. 19(3), pages 1125-1151, September.
    • Handle: RePEc:spr:reaccs:v:19:y:2014:i:3:d:10.1007_s11142-014-9293-8
    DOI: 10.1007/s11142-014-9293-8
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    Cited by:

    1. Rebecca N. Hann, 2014. "A discussion of “Inter-industry network structure and the cross-predictability of earnings and stock returns”," Review of Accounting Studies, Springer, vol. 19(3), pages 1225-1233, September.

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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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