Aini QIU
Hong Kong Polytechnic University
Jeong-Bon Kim
Hong Kong Polytechnic University
Abstract: When investigating the abnormal price movements after the earnings announcements in Chinese stock market, a unique matrix is found in the current study. Both underreactions and overreactions are observed upon earnings announcements. A positive earnings surprise leads to subsequent reversals in big firms but drifts in small firms; a negative earnings surprise is associated with drifts in big firms but reversals in small firms. We explain the observed pattern as a reflection of investors¡¯ fixation on firm size, or systematic optimism towards big firms. The finding in the current study is consistent with functional fixation hypothesis (FFH) in literature. Additionally, this study also shows that earnings information is only useful during the announcement period, and it never plays a role any more subsequently. Instead, firm size, and/or tradable percentage of total shares serve as more important determinants underlying the post-announcement period abnormal returns.
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