Abstract
We provide systematic evidence of stock return reversals for trades placed in anticipation of an impending news release. Using quarterly earnings announcements as the information event, we find that pre-announcement returns are robust positive predictors of unexpected earnings, but robust negative predictors of announcement window returns. Selling firms with large positive preannouncement returns and buying firms with large negative pre-announcement returns earns abnormal returns of 108 basis points over the three-day announcement period. Returns are positive in 74 of 79 quarters from 1990-2009 and strongest during periods of bullish investor sentiment. Cross-sectional analyses shows that this return pattern is most pronounced among “glitter” firms and firms with poor information environments. Taken together, our results are consistent with systematic noise trades influencing pre-announcement prices that are subsequently reversed with the revelation of news.
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