IDEAS home Printed from https://ideas.repec.org/a/wly/jfutmk/v38y2018i4p478-492.html
   My bibliography  Save this article

Investor attention and stock market under‐reaction to earnings announcements: Evidence from the options market

Author

Listed:
  • Xuewu Wesley Wang
  • Zhipeng Yan
  • Qunzi Zhang
  • Xuechen Gao

Abstract

Using a broad sample of earnings announcements, we show that the initial stock market's response substantially increases and the post‐earnings announcement drift becomes much weaker in the presence of more active pre‐earnings option trading. We find that the strongest initial stock market's response originates from those announcements with higher pre‐earnings option trading, fewer competing announcements, and made on non‐Fridays. Our interpretation is that the heightened investor attention, as captured by higher pre‐earnings option trading, fewer competing announcements, and non‐Friday announcements, accelerates the stock market's response and mitigates the stock market under‐reaction.

Suggested Citation

  • Xuewu Wesley Wang & Zhipeng Yan & Qunzi Zhang & Xuechen Gao, 2018. "Investor attention and stock market under‐reaction to earnings announcements: Evidence from the options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(4), pages 478-492, April.
    • Handle: RePEc:wly:jfutmk:v:38:y:2018:i:4:p:478-492
    DOI: 10.1002/fut.21890
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/fut.21890
    Download Restriction: no
    File URL: https://libkey.io/10.1002/fut.21890?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jennings, Robert & Starks, Laura, 1986. "Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets," Journal of Finance, American Finance Association, vol. 41(1), pages 107-125, March.
    2. Zhi Da & Joseph Engelberg & Pengjie Gao, 2011. "In Search of Attention," Journal of Finance, American Finance Association, vol. 66(5), pages 1461-1499, October.
    3. Joshua Livnat & Richard R. Mendenhall, 2006. "Comparing the Post–Earnings Announcement Drift for Surprises Calculated from Analyst and Time Series Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 44(1), pages 177-205, March.
    4. repec:bla:jfinan:v:53:y:1998:i:5:p:1775-1798 is not listed on IDEAS
    5. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    6. Hirst, DE & Hopkins, PE, 1998. "Comprehensive income reporting and analysts' valuation judgments," Journal of Accounting Research, Wiley Blackwell, vol. 36, pages 47-75.
    7. Lo, Andrew W & Wang, Jiang, 2000. "Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory," The Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 257-300.
    8. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    9. Kaushik I. Amin & Charles M. C. Lee, 1997. "Option Trading, Price Discovery, and Earnings News Dissemination," Contemporary Accounting Research, John Wiley & Sons, vol. 14(2), pages 153-192, June.
    10. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, April.
    11. Francis, J & Pagach, D & Stephan, J, 1992. "The Stock-Market Response To Earnings Announcements Released During Trading Versus Nontrading Periods," Journal of Accounting Research, Wiley Blackwell, vol. 30(2), pages 165-184.
    12. David Hirshleifer & Sonya Seongyeon Lim & Siew Hong Teoh, 2009. "Driven to Distraction: Extraneous Events and Underreaction to Earnings News," Journal of Finance, American Finance Association, vol. 64(5), pages 2289-2325, October.
    13. Mark Bagnoli & William Kross & Susan G. Watts, 2002. "The Information in Management’s Expected Earnings Report Date: A Day Late, a Penny Short," Journal of Accounting Research, Wiley Blackwell, vol. 40(5), pages 1275-1296, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Goodell, John W. & Kumar, Satish & Li, Xiao & Pattnaik, Debidutta & Sharma, Anuj, 2022. "Foundations and research clusters in investor attention: Evidence from bibliometric and topic modelling analysis," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 511-529.
    2. repec:grz:wpsses:2020-04 is not listed on IDEAS
    3. Fink, Josef, 2021. "A review of the Post-Earnings-Announcement Drift," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    4. Ahmad, Fawad & Oriani, Raffaele, 2022. "Investor attention, information acquisition, and value premium: A mispricing perspective," International Review of Financial Analysis, Elsevier, vol. 79(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ahmad, Fawad & Oriani, Raffaele, 2022. "Investor attention, information acquisition, and value premium: A mispricing perspective," International Review of Financial Analysis, Elsevier, vol. 79(C).
    2. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    3. Jordan Moore, 2020. "Glamour among value: P/E ratios and value investor attention," Financial Management, Financial Management Association International, vol. 49(3), pages 673-706, September.
    4. Alejandro Bernales & Marcela Valenzuela & Ilknur Zer, 2023. "Effects of Information Overload on Financial Markets: How Much Is Too Much?," International Finance Discussion Papers 1372, Board of Governors of the Federal Reserve System (U.S.).
    5. Doron Israeli & Ron Kasznik & Suhas A. Sridharan, 2022. "Unexpected distractions and investor attention to corporate announcements," Review of Accounting Studies, Springer, vol. 27(2), pages 477-518, June.
    6. Heusel, Nicola & Mager, Ferdinand, 2023. "Pension funding and the cross section of stock returns - The case of Germany," Journal of Banking & Finance, Elsevier, vol. 150(C).
    7. Verhoeks, Ralph C. & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2024. "Wall street watches Washington: Asset pricing implications of policy uncertainty," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).
    8. Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1533-1570, Elsevier.
    9. Boulland, Romain & Dessaint, Olivier, 2017. "Announcing the announcement," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 59-79.
    10. Qian Chen & Xiang Gao & Gangchen Liu, 2021. "Limited Attention and Post-Earnings Announcement Drift: Evidence from China s Stock Market," International Journal of Economics and Financial Issues, Econjournals, vol. 11(1), pages 1-17.
    11. Muradoglu, Gulnur & Peng, Ni & Qin, Huai & Xia, Chunling, 2024. "Investor attention and market reactions to early announcements in mergers and acquisitions," International Review of Financial Analysis, Elsevier, vol. 91(C).
    12. deHaan, Ed & Shevlin, Terry & Thornock, Jacob, 2015. "Market (in)attention and the strategic scheduling and timing of earnings announcements," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 36-55.
    13. Yun Meng & Christos Pantzalis, 2021. "Lottery-type stocks and corporate strategies at the turn of the month," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 1027-1055, April.
    14. Zhu, Hui, 2014. "Implications of limited investor attention to customer–supplier information transfers," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(3), pages 405-416.
    15. Lin, Mei-Chen & Wu, Chu-Hua & Chiang, Ming-Ti, 2014. "Investor attention and information diffusion from analyst coverage," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 235-246.
    16. Kuo, Wei-Yu & Zhao, Jing, 2023. "Pre-holiday limit order cancellation of individual and institutional investors," Finance Research Letters, Elsevier, vol. 52(C).
    17. Michaely, Roni & Rubin, Amir & Vedrashko, Alexander, 2016. "Are Friday announcements special? Overcoming selection bias," Journal of Financial Economics, Elsevier, vol. 122(1), pages 65-85.
    18. Chu, Gang & Li, Xiao & Zhang, Yongjie, 2022. "Information demand and net selling around earnings announcement," Research in International Business and Finance, Elsevier, vol. 59(C).
    19. Chen, Linda H. & Jiang, George J. & Zhu, Kevin X., 2018. "Total attention: The effect of macroeconomic news on market reaction to earnings news," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 142-156.
    20. Hu, Shiyang & Xiang, Cheng & Quan, Xiaofeng, 2023. "Salience theory and mutual fund flows: Empirical evidence from China," Emerging Markets Review, Elsevier, vol. 54(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jfutmk:v:38:y:2018:i:4:p:478-492. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0270-7314/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.