Abstract
We provide evidence that the asymmetrical price reaction to bad news at earnings announcements is most pronounced when overall market price-earnings ratios are high. This finding is consistent with both unwarranted investor optimism and investor uncertainty. However, evidence also indicates that the difference between earnings responses to good and bad news exhibit a U-shape in the level of the market, which is consistent with Veronesi's (1999) model of investor uncertainty. However, the response to both good and bad news increases at low market levels. Although this is inconsistent with Veronesi (1999), it may be attributable to the leverage effect discussed in Black (1976).
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