Security Returns Around Earnings Announcements
SYNOPSIS AND INTRODUCTION: We examine risk, return, and abnormal return behavior in the days around quarterly earnings announcements, using a research design that allows risk to vary daily in event time. We test several hypotheses concerning the effect on security prices of earnings announcements per se (i.e. ignoring both the sign and the magnitude of earnings) The first hypothesis concerns the resolution of uncertainty over time. By conveying information about firms' activities, earnings announcements resolve some uncertainty about future cash flows, but the concurrent price reactions increase the variability and covariability of securities' returns during the announcements. Thus, it is hypothesized that return variances and betas, and therefore expected returns, increase during earnings announcement periods (Stapleton and Subrahmanyam 1979; Epstein and Turnbull 1980; Choi and Salamon 1989) Previous research has demonstrated anomalous positive abnormal returns during earnings announcements (Chambers and Penman 1984; Penman 1984, 1987; Chari et al. 1988) Because risk was not allowed to vary in event time in this research, it does not adequately distinguish between increased expected returns and true abnormal returns. We report that abnormal returns remain after controlling for risk increases at earnings announcements. The abnormal returns are not related to any overor under reaction by the market to earnings news (see, e.g. DeBondt and Thaler 1985, 1987; Bernard and Thomas 1989) because we do not condition on the earnings realization.