Earnings News Research Articles

The relevance of dark trading for information acquisition in the German stock market

The implementation of the European double volume cap (DVC) mechanism acts as an exogenous shock to help understand how restrictions on dark trading affect the price discovery process for German stocks. Using the price jump ratio as a measure of information acquisition prior to earnings announcements, we show that dark pool trading aids information acquisition. This relationship is stronger for negative earnings news, for stocks that are hard to value, and when there is uncertainty around earnings. The introduction of the DVC mechanism weakens the relationship between dark trading and pre-announcement information acquisition.

Insider Trading before Earnings News: The Role of Executive Pay Disparity

We investigate how executive pay disparity affects insider profits around earnings news. Our findings reveal that high pay disparity is linked to higher abnormal returns from insider purchases before positive news, suggesting insiders exploit good news for greater gains. Conversely, it is associated with lower abnormal returns from insider sales before negative news, indicating less benefit from such sales. These insights highlight the influence of pay disparity on insider trading and underscore the importance of understanding this dynamic to improve decision-making and reduce misuse of insider information.

Insider opportunistic trading through fast sales: Evidence from China

Using a sample of insider sales from firms listed on China's A-share market from 2010 to 2023, we provide robust evidence that insiders engage in fast sales when stocks have better pre-sale performance, compared to slow sales. Additionally, these fast sales predict lower abnormal returns in both the short and long term. Insider opportunistic trading through fast sales is more prominent in firms with high levels of information asymmetry and among insiders facing intense information competition. We find weak evidence that independent directors, institutional investors, and analyst coverage play a role in reducing such insider opportunistic trading. Finally, insider opportunistic trading through fast sales also predicts subsequent stock price crashes and extremely negative earnings news. Our findings help decipher the information content of insider sales in China's market.

Investor cognitive engagement with earnings information: evidence from pupillary response

Using pupillary response data collected in a laboratory setting, this study examines the antecedents and consequences of investors’ cognitive engagement with earnings press releases. We predict that investors’ cognitive engagement is higher when key financial information is included in the headline section of the earnings release, and that their level of cognitive engagement affects their willingness to invest. Our experiment reveals that when reading an earnings release that headlines key financial information, investors exhibit enhanced cognitive engagement as evidenced by increased pupil dilation compared to when reading a release that does not include key financial information in the headline section. These results hold for both good and bad earnings news. Furthermore, OLS regressions show that investors with greater pupil dilation, on average, exhibit increased willingness to invest only when the earnings news is positive. This relation is however nonlinear, with a significant impact on investment decisions observed only when cognitive engagement is relatively high. We also find that investors’ cognitive engagement varies when they read different sections of the earnings release. Taken together, our findings use pupillary responses to provide new insights into investors’ cognitive reactions to earnings news.

Number Processing Constraints and Earnings News

Neuroscience shows that human brains are neurologically constrained to process small numbers linearly and large numbers logarithmically, leading to underreactions to larger numbers as their perceived difference becomes smaller. We test this hypothesis in the context of earnings announcements and find that investors respond less in the short term to earnings news for stocks with high earnings per share magnitudes, exacerbating postearnings announcement drift for these stocks. These findings are distinct from and incremental to several risk-based and behavioral explanations, attenuated by robot presence and present in a quasi-experimental design using stock splits. Our evidence suggests that number processing constraints have implications for stock price efficiency. This paper was accepted by Will Cong, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.01722 .

Performance implications of hedging with industry ETFs

Extant research documents that hedge funds which bet on positive earnings surprises manage their sector risk by shorting industry exchange-traded funds (ETFs). We add to this literature by evaluating the performance of a hypothetical hedge fund that can anticipate positive earnings news. We construct return series for a naked strategy that only takes long stock positions and a hedged strategy that also holds short positions in industry ETFs around earnings announcements with positive content. Our main result is that hedging with industry ETFs improves fund performance based on various reward-to-risk ratios. This finding holds in various equity subsamples and both strategies tend to perform better among riskier stocks. Hedging with industry ETFs boosts fund performance compared to hedging with a broad market index.

The impact of insider ownership and institutional ownership on post-earnings-announcement-drift: Evidence from Vietnam

In this study, we first document the existence of post-earnings-announcement-drift (PEAD) in Vietnam, consistent with investors’ under-reaction to earnings surprises. We then investigate whether and how institutional ownership and insider ownership affect PEAD. We find that the magnitude of PEAD effect is stronger among firms with higher insider ownership. We argue that higher insider ownership may increase information opacity and impede efficient processing of earnings news among investors. We provide supporting empirical evidence for this argument. Furthermore, in contrast to the conventional view that institutional investors exploit PEAD and accelerate the speed of price discovery, we find that institutional investors do not have significant impacts on PEAD. We argue that this result is consistent with recent findings in the US and China that some institutional investors may herd, hence, not necessarily help to mitigate PEAD. Our findings provide useful insights about the effect of insider investors and institutional investors on the delayed response to earnings news in the context of Vietnam.

Institutional trading, news, and accounting anomalies

Previous studies find mixed evidence on whether institutional investors exploit capital market anomalies. Examining a large sample of accounting-based anomalies, we find that institutions trade in the wrong direction of overreaction anomalies, but in the right direction of underreaction anomalies. These heterogenous trading patterns, rather than reflecting institutions' differential anomaly trading skills, can be simply explained by institutions’ tendency to trade in the same direction as the sentiment of news. Examining earnings news and a comprehensive sample of newswire releases, we find strong support for this explanation. Finally, institutional trading appears to exacerbate (mitigate) mispricing associated with overreaction (underreaction) anomalies.

Earnings News and Over‐the‐Counter Markets

ABSTRACTWe document significant increases in bond market liquidity around earnings announcements. These increases are attributed to decreased search and bargaining costs, which arise from the over‐the‐counter (OTC) nature of bond markets and outweigh increases in information asymmetry during these periods. Our evidence traces reductions in search and bargaining costs to two sources around earnings announcements: (1) improved access to dealers and (2) increased participation from institutional investors, who can more easily transact with multiple dealers. Overall, our findings highlight a novel channel through which firm‐specific information affects asset prices.

The Effects of Daylight Saving Time Adjustments on Investor Information Processing

ABSTRACT Although daylight saving time (DST) is thought to provide economic benefits, extant research documents various adverse effects of DST adjustments. However, prior research provides little conclusive evidence about the effects of DST adjustments on capital market participants. We examine the effects of “spring forward” DST advances, which disrupt the human sleep cycle and economic activities, on investors’ processing of earnings news. We find a delayed price response to earnings news released during the first week following a DST advance. We also find that this effect is stronger among firms with investors who are more likely to be trading on earnings news and among firms with less sophisticated investors. Our findings contribute to research on the unintended consequences of DST adjustments and to the growing literature on intra-investor variation in disclosure processing costs. Our study may be of interest to legislators currently debating proposed legislation that would eliminate DST phasing. Data Availability: Data are available from the sources cited in the text. JEL Classifications: D83; G14; M41; M48.

Managerial ability and firm’s tweeting activity

We explore the effect of managerial ability on firms’ tweeting activity. Using daily tweeting activity data, we find that managerial ability is positively associated with the frequency of daily tweets. Such association is prominent when the earnings news is unfavorable. We do not find the association when the earnings news is favorable. Furthermore, we find that firms with high ability managers tweet more when the sales news is unfavorable, but not when the sales news is favorable. Taken together, our findings suggest that managerial ability is an important factor for decision to communicate on Twitter and plays a significant role especially when markets perceive firm’s performance to be bad.

Earnings News and Over-the-Counter Markets

Earnings News and Over-the-Counter Markets

Number Processing Constraints and Earnings News

Number Processing Constraints and Earnings News

Earnings News and Local Household Spending

Earnings News and Local Household Spending

Country-Level Loss Aversion and the Market Response to Earnings News

Country-Level Loss Aversion and the Market Response to Earnings News

Wall street watches Washington: Asset pricing implications of policy uncertainty

We examine the effect of economic policy uncertainty (EPU) on sell-side analysts’ forecasts, the allocation of attention, and the stock market reaction to earnings news. We find that periods of high EPU are associated with higher analyst disagreement and a decrease in forecast accuracy. Specifically, we show that analysts issue on average more pessimistic forecasts when EPU is high. Second, we show that higher levels of EPU are associated with higher attention to the overall stock market and lower firm-level attention, in line with category learning behavior. Forecast errors also have a larger firm-specific component during periods of high EPU. Finally, we show that the trading volume and price responses to earnings announcements hardly depend on EPU. Hence, investors tend to follow analyst forecasts, thereby failing to incorporate a predictable bias.

To read or to listen? Does disclosure delivery mode impact investors' reactions to managers' tone language?

AbstractWe examine how disclosure delivery mode—oral versus written—influences investors' reactions to managers' tone language. We hypothesize that listening to disclosures, relative to reading them, causes managers' qualitative word choices to have a greater impact on investors' judgments. We theorize that this effect occurs because oral delivery mode promotes heuristic processing and qualitative tone language is an easy‐to‐process disclosure element. The results from an experiment in a conference call setting are consistent with our hypothesis and suggest a boundary condition. Specifically, the interaction of mode and tone language is significant in a setting where heuristic processing is likely (good earnings news) but not in a setting where investors are likely to scrutinize the disclosure (bad earnings news). Our results inform investors about the potential consequences of how they consume disclosures. Specifically, we show that investors are more susceptible to managers' tone language when listening to disclosures containing good news than when reading them.

The Brand Value of Earnings: An Event Study of Consumer Responses to Earnings Announcements

ABSTRACT We provide evidence from the first short-window event study of consumers’ perceptual responses to earnings announcements using daily consumer perception data. We document a positive association between the change in consumers’ overall perceptions of a brand at the time of the earnings announcement and the earnings surprise—that is, a positive consumer earnings response coefficient (CERC). CERC is larger when there is greater traditional news or social media activity, indicating that news dissemination is an important channel for consumers to respond to earnings news. Moreover, CERC varies based on brand and consumer characteristics. Changes in consumer perceptions at the time of the earnings announcement are positively associated with changes in purchase consideration and intent and with changes in realized future sales growth. To maximize identification, we document a positive and statistically significant CERC in a controlled experiment. Our findings demonstrate the importance of earnings to an important stakeholder. Data Availability: Data are available from the sources cited in the text. JEL Classifications: M31; M41; G14.

Mandatory Monthly Sales Disclosure and the Information Content of Earnings

Synopsis The research problem Taiwanese stock markets practice a unique form of reporting frequency, combining quarterly interim financial reports with mandatory monthly sales announcements. This unique setting allows us to compare the information content of quarterly earnings that are announced before, bundled with, or announced after the monthly sales disclosures. Motivation Monthly sales disclosures likely contribute to the pricing of earnings announcements (EAs) by providing investors with valuable information that helps them revise their expectations when forecasting earnings and cash flows. We examine whether monthly sales disclosures help investors to process earnings information. The test hypotheses Our first hypothesis is that the immediate market response to earnings news is lower if the previous quarter’s EAs are disclosed after the reporting of monthly sales for the first month of the next quarter. Our second hypothesis is that the subsequent market response to earnings news is lower if the previous quarter’s EAs are disclosed after the reporting of monthly sales for the first month of the next quarter. Target population We studied a sample of Taiwanese listed firms from 2014 through 2018. Adopted methodology We used multivariate regressions to test the hypotheses. Analyses We examined the monthly sales disclosures for the first month of quarter [Formula: see text], which are released within the first 10 days of the second month of quarter [Formula: see text]. We analyze the pricing of the content of the earnings of quarter q, conditional on whether the earnings are released before, simultaneously with, or released after the monthly sales disclosures. Findings We found that earnings disclosed after the monthly sales news are associated with weaker EA returns and post-EA drift, relative to earnings disclosed before or bundled with the monthly sales news. These results suggest that monthly sales disclosures preempt the information content of late EAs. More importantly, we found that late EAs are associated with less positive correlation between EA returns and post-EA returns than early and bundled EAs. Overall, these results suggest that by providing timely sales information, monthly sales disclosures improve the information environment.

Accrual quality, investor reaction to earnings, and the confirmatory role of sales news

Purpose: Agency theory predicts that information asymmetry provides agents with an incentive to manipulate performance signals to maximize their utility, which gives principals reasons to distrust such signals. The accounting and finance literature finds empirical support for this prediction by studying how earnings reliability attributes affect investors' reactions to earnings an-nouncements. However, research pays less empirical attention to whether in-vestors skeptical of earnings reliability look for confirmatory signals in other parts of the income statement. This study aims at filling such this research gap. Design/methodology/approach: This study examines investors' combined use of earnings and sales news. It adopts an event-study methodology to ana-lyze whether sales news moderates the stock market response to annual earn-ings announcements. Findings: The results show that investors do not fully trust earnings news if earnings beat analyst expectations and the firm has a reputation for low accru-al quality. In this case, positive sales data alleviate investors' skepticism of earnings news and, thus, make them react more favorably. In contrast, sales data do not affect the market response if the earnings news is negative, or the firm accrual quality is high. These results are robust to different model speci-fications and explanations. Originality/value: The findings shed new light on how investors use sales data to complement earnings news and our understanding of the consequences of accruals quality on investor information processing.