The Efficiency of Market Reactions to Earnings News

• In Event: Market Reactions to Earnings

Abstract

We examine the market reactions to earnings news with a stochastic frontier model approach. The model allows for the existence and estimation of the magnitude of inefficiency in the earnings-return relation. We find that the market’s reaction to earnings news is more efficient for firms with better information environment, higher liquidity, higher institutional ownership, and when investors are less distracted by extraneous events. In addition, we document a strong and positive correlation between our estimate of the market’s underreaction at the time of announcement and the post-announcement abnormal returns. We also find evidence that this measure is superior to standardized unexpected earnings or earnings announcement returns in predicting post-announcement returns.

Authors

• Bin Miao, National University of Singapore

• Gillian Yeo, Nanyang Technological University