Attention to Market Information and Underreaction to Earnings on Market Moving Days

Abstract

Post-earnings announcement drift (PEAD) is stronger in firms that release earnings on days when market returns are higher in magnitude. This drift remains robust after controlling for previously documented factors such as Friday releases, the number of simultaneous releases, and price delay measure. Negative earnings surprises drive this drift, and the drift is more pronounced among small stocks, value stocks, and stocks that have low analyst following. Slower analyst response to earnings contributes to the drift. These findings are consistent with investors paying more attention to market information and less attention to firm-specific information due to attention constraints.

Limited investor attention and biased reactions to information: Evidence from the COVID-19 pandemic

“…Prior studies provide empirical evidence of attention constraints, particularly on the incorporation of earnings news. For instance, Kottimukkalur (2019) documents more post-earnings announcement drifts following large market-moving days, consistent with reduced (heightened) attention paid to firm-specific (market-wide) information. There exists more investor inattention to Friday earnings announcements ( DellaVigna and Pollet, 2009 ), and the processing of earnings news could be affected by weather-induced moods ( Dehaan et al, 2017 ).…”

“…On the one hand, Peng and Xiong (2006) show theoretically that limited attention leads to category-learning behavior (i.e., the tendency of investors to process more market and sector-wide information than firm-specific information). Prior studies largely focus on earnings news and provide evidence of underreaction supporting that less attention is allocated to firm-specific information (e.g., Kottimukkalur, 2019 ). Given that the pandemic and its evolution are related to macroeconomic fundamentals and the difficulty in processing multiple pieces of information simultaneously, we expect investors to allocate more attention to macro information and get distracted from micro information during the pandemic and such pandemic-induced changes in attention to increase with the epidemic spread.…”

Retail Attention, Institutional Attention

“…In addition, Peng et al (2007) and Huang et al (2019) find that the prioritized processing of macro news generates excessive return comovements. Similarly, Kottimukkalur (2019) finds more post-earnings announcement drifts following large market-moving days. While these papers examine important equilibrium outcome variables, they are only able to make indirect inferences about investor attention.…”

Analysis of the influence of enterprise managers’ overconfidence on the overinvestment behavior of listed companies under the media reports

“…Second, negative media reports will draw widespread public attention. Especially under the trend of rapid development of mass media in recent years, negative reports will cause certain pressure on public opinion, which will lead to the high attention and key supervision of administrative and regulatory departments ( Kottimukkalur, 2018 ). This gives enterprises stronger supervision, and it is easier, more accurate and timely to detect irrational behaviors and irregularities of enterprises.…”

“…The marketization processes is a concentrated manifestation of the comprehensive environment of a region, which affects the activities and behaviors of different players in the market, and virtually supervises and restrains all players in the market ( Kunjal et al, 2021 ; Akbar et al, 2022 ). As an important manifestation of the macro environment, the marketization processes will not only affect the governance role of the media, but also affect the behavior and decision-making of managers, thereby affecting the investment efficiency of enterprises ( Kottimukkalur, 2018 ).…”