Limited Attention and Stock Price Drift Following Earnings Announcements and 10-K Filings

Abstract

Earnings announcements and 10-K filings are two important channels through which companies release financial information to the public. Earnings announcements, particularly for large firms, are often accompanied by intensive media coverage. In contrast, 10-K filings are usually of much lower profile, attracting little investor attention. Limited attention hypothesis suggests that investors’ failure to devote enough attention to an economic event leads to underreaction, and the degree of underreaction should decrease with the amount of investor attention. In this paper we document evidence consistent with this hypothesis. First, we show that among large firms, investors under-react more to the information contained in 10-K filings than earnings announcements. Second, underreaction to earnings announcements tends to be stronger for small firms than large firms. In contrast, investor underreaction to 10-K information is similar between the two groups of firms. Third, we find that companies report their earnings and 10-Ks earlier when there is a higher demand for such information, and document a negative relationship between the degree of underreaction and the timeliness of such information release. Finally, we show that the recent ruling by SEC to accelerate 10-K filing has little impact on the degree of investors’ underreaction to 10-K information.