An analytical measure of market underreaction to earnings news

Kee H. Chung; Oliver Kim; Steve C. Lim; Sean Yang

doi:10.1016/j.iref.2019.08.005

An analytical measure of market underreaction to earnings news

Kee H. Chung
, Oliver Kim
, Steve C. Lim
, Sean Yang

Finance

University of Maryland, College Park
Texas Christian University
Oregon State University

Research output: Contribution to journal › Article › peer-review

4 Scopus citations

Abstract

Prior studies have provided a number of possible explanations for delayed market reactions to earnings announcements. However, there has been relatively little effort to predict the magnitude of the post-earnings announcement drift (PEAD). We show that the squared correlation coefficient (ρ²) between order imbalance and earnings surprise determines the magnitude of market underreaction to earnings surprises and PEAD=k⋅ρ², where k is the information content of earnings. We discuss several testable implications of our analytical results, including a model-implied measure of information asymmetry that arises from the differential information processing ability of traders.

Original language	English
Pages (from-to)	612-624
Number of pages	13
Journal	International Review of Economics and Finance
Volume	64
DOIs	https://doi.org/10.1016/j.iref.2019.08.005
State	Published - Nov 2019

Keywords

Information asymmetry
Information content
Information precision
Liquidity demander
Liquidity provider
Order imbalance
Price impact
Strategic trading

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10.1016/j.iref.2019.08.005

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title = "An analytical measure of market underreaction to earnings news",

abstract = "Prior studies have provided a number of possible explanations for delayed market reactions to earnings announcements. However, there has been relatively little effort to predict the magnitude of the post-earnings announcement drift (PEAD). We show that the squared correlation coefficient (ρ2) between order imbalance and earnings surprise determines the magnitude of market underreaction to earnings surprises and PEAD=k⋅ρ2, where k is the information content of earnings. We discuss several testable implications of our analytical results, including a model-implied measure of information asymmetry that arises from the differential information processing ability of traders.",

keywords = "Information asymmetry, Information content, Information precision, Liquidity demander, Liquidity provider, Order imbalance, Price impact, Strategic trading",

author = "Chung, \{Kee H.\} and Oliver Kim and Lim, \{Steve C.\} and Sean Yang",

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T1 - An analytical measure of market underreaction to earnings news

AU - Chung, Kee H.

AU - Kim, Oliver

AU - Lim, Steve C.

AU - Yang, Sean

PY - 2019/11

Y1 - 2019/11

N2 - Prior studies have provided a number of possible explanations for delayed market reactions to earnings announcements. However, there has been relatively little effort to predict the magnitude of the post-earnings announcement drift (PEAD). We show that the squared correlation coefficient (ρ2) between order imbalance and earnings surprise determines the magnitude of market underreaction to earnings surprises and PEAD=k⋅ρ2, where k is the information content of earnings. We discuss several testable implications of our analytical results, including a model-implied measure of information asymmetry that arises from the differential information processing ability of traders.

AB - Prior studies have provided a number of possible explanations for delayed market reactions to earnings announcements. However, there has been relatively little effort to predict the magnitude of the post-earnings announcement drift (PEAD). We show that the squared correlation coefficient (ρ2) between order imbalance and earnings surprise determines the magnitude of market underreaction to earnings surprises and PEAD=k⋅ρ2, where k is the information content of earnings. We discuss several testable implications of our analytical results, including a model-implied measure of information asymmetry that arises from the differential information processing ability of traders.

KW - Information asymmetry

KW - Information content

KW - Information precision

KW - Liquidity demander

KW - Liquidity provider

KW - Order imbalance

KW - Price impact

KW - Strategic trading

UR - https://www.scopus.com/pages/publications/85072514021

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DO - 10.1016/j.iref.2019.08.005

M3 - Article

AN - SCOPUS:85072514021

SN - 1059-0560

VL - 64

SP - 612

EP - 624

JO - International Review of Economics and Finance

JF - International Review of Economics and Finance

ER -

An analytical measure of market underreaction to earnings news

Abstract

Keywords

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