Headline Salience and Over- and Underreactions to Earnings

• In Event: Earnings News Anomalies

Abstract

Limited attention theory predicts that higher salience of earnings news implies a stronger immediate investor reaction to earnings news and a weaker post-earnings announcement drift (PEAD) or reversal (PEAR). Using a new measure, SALIENCE, defined as the number of quantitative items in an earnings press release headline, we find strong evidence consistent with salience effects. Higher SALIENCE is associated with stronger announcement reaction and subsequent PEAR. Firms are more likely to choose higher SALIENCE when they have profits, higher current earnings, lower earnings persistence, and greater post-announcement insider selling. The results are robust to using residual salience and an extended set of control variables. The findings are consistent with attention effect on price, and with managers opportunistically headlining positive financial information in the earnings press release to incite overoptimism in investors with limited attention.

Authors

• Xuan Huang, California State University at Long Beach

• Alexander Nekrasov, University of California-Irvine

• Siew Hong Teoh, University of California-Irvine