|
The Efficiency of Market Reaction to Earnings News
Bin Miao,
Nanyang Technological University
ABSTRACT. We investigate the efficiency of market reaction to earnings news with a stochastic frontier model approach. The model allows for the existence of a one-sided stochastic error term, which in our context captures any market inefficiency in the earnings-return relationship, and thus makes it possible for one to draw inference about the announcement-specific variations in market efficiency. We find that market’s response to earnings news is more efficient for stocks that have lower arbitrage risk, larger market capitalization, more analyst following, lower transaction cost, less information uncertainty, and lower book-to-market ratio. In addition, we find no evidence that short-sale constraints impair the pricing efficiency of unexpected earnings. Finally, we document a strong and positive correlation between our estimate of underreaction and post-announcement abnormal return, and find that this correlation subsumes the ability of unexpected earnings to predict future returns.
Full-Text is no longer available online. Please contact the author(s) for more information about this manuscript.
Back to Session Listing
|