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Limited attention and stock price drift following earnings announcements and 10‐K filings

Limited attention and stock price drift following earnings announcements and 10‐K filings Purpose – This study aims to examine whether limited attention leads to the market underreaction to earnings announcement and 10‐K filings. Design/methodology/approach – This is an empirical study involving statistical analysis of a large sample of data, obtained from Compustat, CRSP and Xignite Inc. Both portfolio analysis and multivariate regressions are used in hypotheses testing. Findings – The following key findings are presented in the paper. First, we show that among large firms, investors under‐react more to the information contained in 10‐K filings than earnings announcements. Second, underreaction to earnings announcements tends to be stronger for small firms than large firms. Third, we find that companies report their earnings and 10‐Ks earlier when there is a higher demand for such information, and document a negative relationship between the degree of underreaction and the timeliness of such information release. Finally, we show that the recent ruling by SEC to accelerate 10‐K filing has little impact on the degree of investors' underreaction to 10‐K information. Research limitations/implications – The findings of this study suggest that investors' failure to devote enough attention to an economic event leads to underreaction, and the degree of underreaction is negatively correlated with the amount of investor attention. Practical implications – Investors need to periodically reassess the informational contents of economic events, and allocate their attention accordingly, in order to avoid underreaction. Originality/value – This study analyzes and the roles of limited attention in determining the degree of investor underreaction to earnings announcement and 10‐K filings. The comparison of the two related but distinct financial reporting events yields interesting insights. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Limited attention and stock price drift following earnings announcements and 10‐K filings

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
2044-1398
DOI
10.1108/20441391111167487
Publisher site
See Article on Publisher Site

Abstract

Purpose – This study aims to examine whether limited attention leads to the market underreaction to earnings announcement and 10‐K filings. Design/methodology/approach – This is an empirical study involving statistical analysis of a large sample of data, obtained from Compustat, CRSP and Xignite Inc. Both portfolio analysis and multivariate regressions are used in hypotheses testing. Findings – The following key findings are presented in the paper. First, we show that among large firms, investors under‐react more to the information contained in 10‐K filings than earnings announcements. Second, underreaction to earnings announcements tends to be stronger for small firms than large firms. Third, we find that companies report their earnings and 10‐Ks earlier when there is a higher demand for such information, and document a negative relationship between the degree of underreaction and the timeliness of such information release. Finally, we show that the recent ruling by SEC to accelerate 10‐K filing has little impact on the degree of investors' underreaction to 10‐K information. Research limitations/implications – The findings of this study suggest that investors' failure to devote enough attention to an economic event leads to underreaction, and the degree of underreaction is negatively correlated with the amount of investor attention. Practical implications – Investors need to periodically reassess the informational contents of economic events, and allocate their attention accordingly, in order to avoid underreaction. Originality/value – This study analyzes and the roles of limited attention in determining the degree of investor underreaction to earnings announcement and 10‐K filings. The comparison of the two related but distinct financial reporting events yields interesting insights.

Journal

China Finance Review InternationalEmerald Publishing

Published: Sep 9, 2011

Keywords: Stock price drift; Earnings; 10‐K; Limited attention; Investors

References