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Driven to Distraction: Extraneous Events and Underreaction to Earnings News
David Hirshleifer, University of California Irvine
Sonya Lim, DePaul University
Siew Hong Teoh, University of California Irvine
ABSTRACT. Psychological evidence indicates that it is hard to process multiple stimuli and perform multiple tasks at the same time. This paper tests the investor distraction hypothesis, which holds that the arrival of extraneous news causes trading and market prices to react sluggishly to relevant news about a firm. Our test focuses upon the competition for investor attention between a firm’s earnings announcements and the earnings announcements of other firms. We find that the immediate stock price and volume reaction to a firm’s earnings surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day. A trading strategy that exploits post-earnings announcement drift is most profitable for earnings announcements made on days with a lot of competing news, but it is not profitable for announcements made on days with little competing news.
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