Limits to Arbitrage, Market Sentiment, and Return Patterns after Earnings Announcements

• In Event: Earnings & Leases

Abstract

We find that stock-level information uncertainty significantly affects the post earnings announcement return patterns in an asymmetric fashion. Specifically, when earnings surprise contradicts the prevailing market sentiment, stocks with higher information uncertainty demonstrate a greater return drift. However, when earnings surprise is consistent with market sentiment, such highly uncertain stocks exhibit a tendency of return reversals. These results are robust after controlling for well-documented factors contributing to variations in the magnitude of return patterns. Our findings suggest that stock market overreacts to consistent news and underreacts to inconsistent news with market sentiment.

Authors

• Jeremy Goh, Singapore Management Unversity

• Lisa Yang, Montana State University