Abstract
Consistent with the predictions from a stylized Bayesian learning model, this study shows the opposite effects of two types of uncertainty— market uncertainty and firm-specific uncertainty — on investors’ learning from new information. I provide novel evidence that investor learning increases with the level of market uncertainty, and decreases with firm-specific signal uncertainty. The stock price responses to earnings announcements increase when market volatility is high, whereas the price responses decrease when a firm’s cash flow volatility is high. I do not find evidence of alternative explanations such as liquidity effects, increased firm risk, or differences in the information environment under market uncertainty.
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