Investor attention and stock market under‐reaction to earnings announcements: Evidence from the options market

Abstract

Using a broad sample of earnings announcements, we show that the initial stock market's response substantially increases and the post‐earnings announcement drift becomes much weaker in the presence of more active pre‐earnings option trading. We find that the strongest initial stock market's response originates from those announcements with higher pre‐earnings option trading, fewer competing announcements, and made on non‐Fridays. Our interpretation is that the heightened investor attention, as captured by higher pre‐earnings option trading, fewer competing announcements, and non‐Friday announcements, accelerates the stock market's response and mitigates the stock market under‐reaction.

Informed trading around earnings announcements—Spot, futures, or options?

“…Past studies have documented the behavior of options volume around events like mergers and acquisitions, insider trading, bankruptcy, etc. (for instance, Mazouz, Wu, & Yin, 2015;Spyrou, Tsekrekos, & Siougle, 2011;Wang, Yan, Zhang, & Gao, 2018). This study focuses on option volumes around quarterly EA only.…”

“…(for instance,Mazouz, Wu, & Yin, 2015;Spyrou, Tsekrekos, & Siougle, 2011;Wang, Yan, Zhang, & Gao, 2018). (for instance,Mazouz, Wu, & Yin, 2015;Spyrou, Tsekrekos, & Siougle, 2011;Wang, Yan, Zhang, & Gao, 2018).…”

Bayesian Investor Belief Updating Speed and Market Underreaction to Earnings Announcements

“…Classical market microstructure literature often takes a ‘black and white’ view of the world, according to which informed investors are perfectly informed while uninformed investors know nothing (Vives 2008; Wang et al. 2018; Chung et al. 2020).…”

Gambling Behavior of Private Investors in Financial Markets : A Comprehensive Empirical Analysis

“…This is incompatible with research on attention (see Section 3.3.3) where the general premise implies that individuals have to narrow their focus due to basic human cognitive constraints (see . See also Hirshleifer and Teoh (2003), Da et al (2011), Engelberg and Parsons (2011), Chen (2017), Colaco et al (2017), Girardi and Nico (2017), Boyacı and Akçay (2018), Engelberg et al (2018), Gargano and Rossi (2018), and Wang et al (2018). 38 See Oehler (2000bOehler ( ), (2002Oehler ( ), (2004Oehler ( ), (2006aOehler ( , pp.…”