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Driven to distraction: Extraneous events and underreaction to earnings news

  • Hirshleifer, David
  • Lim, Sonya Seongyeon
  • Teoh, Siew Hong

Psychological evidence indicates that it is hard to process multiple stimuli and perform multiple tasks at the same time. This paper tests the INVESTOR DISTRACTION HYPOTHESIS, which holds that the arrival of extraneous news causes trading and market prices to react sluggishly to relevant news about a firm. Our test focuses on the competition for investor attention between a firm's earnings announcements and the earnings announcements of other firms. We find that the immediate stock price and volume reaction to a firm's earnings surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day. Distracting news has a stronger effect on firms that receive positive than negative earnings surprises. Industry-unrelated news has a stronger distracting effect than related news. A trading strategy that exploits post-earnings announcement drift is unprofitable for announcements made on days with little competing news.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3110.

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Date of creation: 15 Mar 2006
Date of revision: 16 Apr 2007
Handle: RePEc:pra:mprapa:3110
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  1. Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2007. "Do industries lead stock markets?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 367-396, February.
  2. Peng, Lin, 2005. "Learning with Information Capacity Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 307-329, June.
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  11. David Hirshleifer & SONYA SEONGYEON LIM & Siew Hong Teoh, 2004. "Disclosure to an Audience with Limited Attention," Game Theory and Information 0412002, EconWPA.
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