Good news, bad news and earnings return relation
Abstract
A large body of literature has been devoted to studying the information content of accounting information, especially earnings numbers issued by a firm, reviewed by Lev, 1989. This paper studies the relation between the magnitude and sign of earnings surprise, and stock returns. The news event studied here is the quarterly earnings announcement. We appeal to Titman and Trueman (1986) and Penno (1995) to provide background for our study. Titman and Trueman (1986) show that precision of bad news is less than precision of good news and the stock price reaction is symmetric in news. In a recent paper Penno (1995) gives a counter example for Titman and Trueman (1986) and shows that the precision of bad news is greater than that of good news and this leads to a stronger stock price reaction to bad news than to good news. We find that the stock price reaction to bad news is stronger than to good news. This differential reaction persists after controlling for: (a) negative earnings (Hayn, 1995), (b) uncertainty about the quality of the information possessed by the firm (Shin, 1994), (c) amount of pre announcement information (McNichols, 1988; Skinner, 1994), (d) differential prior precision of the earnings signal (Kim and Verrecchia, 1991), and (e) firm specific variables such as persistence (Freeman and Tse, 1992) and firm size (Ro, 1989).
Degree
Ph.D.
Advisors
Kross, Purdue University.
Subject Area
Accounting|Finance
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