The False Consensus Effect and Trading Around Earnings Announcements

Abstract

Motivated by research in psychology and experimental economics, we assume that investors update their beliefs about assets' values upon observing the equilibrium price, but only when the price clearly reveals that others inferred private information that differs from their own private information. We examine the implications of this form of learning from price in the context of trade around earnings announcements. We show that asymmetric learning from price results in post-earnings announcement drift, but only among firms whose earnings are expected (ex ante) to be persistent.