Investor Inattention and Friday Earnings Announcements

Abstract

Does limited attention among investors affect stock returns? We compare the response to earnings announcements on Friday, when investor inattention is more likely, to the response on other weekdays. If inattention influences stock prices, we should observe less immediate response and more drift for Friday announcements. Indeed, Friday announcements have a 15% lower immediate response and a 70% higher delayed response. A portfolio investing in differential Friday drift earns substantial abnormal returns. In addition, trading volume is 8% lower around Friday announcements. These findings support explanations of post-earnings announcement drift based on underreaction to information caused by limited attention. * DellaVigna is from the Department of Economics, University of California, Berkeley. Pollet is from the Department of Finance, University of Illinois at Urbana-Champaign. A previous version of the paper was distributed under the title "Strategic Release of Information on Friday: Evidence from Earnings Announcements". We thank John Campbell, David Card, Raj Chetty, James Choi, Kent Daniel, Yonca Ertimur, John Graham, David Hirshleifer, Wei Jiang, Lawrence Katz, David Laibson, Owen Lamont, Ulrike Malmendier, Maria Nondorf, Ashley Pollet, Allen Poteshman, Torsten Persson, Matthew Rabin, Jeremy Stein, Xiao-Jun Zhang, and audiences at Duke (Fuqua), the Hong Kong University of Science and Technology, IIES (Stockholm), London Business School, Northwestern (Kellogg), Stanford University (GSB), University College (London), UC Berkeley, UI Urbana-Champaign, University of Zürich, the Adam Smith Asset Pricing Conference (LBS), the AEA Meetings 2005, the SITE 2004 (Psychology and Economics), and the Yale Conference on Behavioral Science for valuable comments. Jessica Chan, Eric Fleekop, Richard Kim, Clarice Li, Ming Mai, Raymond Son, Matthew Stone, and Terry Yee helped collect the announcement dates from the newswires. Dan Acland, Saurabh Bhargava, and Tatyana Deryugina provided excellent research assistance.Investors have a limited amount of time and cognitive resources to process information. Despite the intuitive appeal of limited attention, little evidence exists on the extent to which the quality of decision-making by investors declines in response to distractions. Incentives, information aggregation across investors, and arbitrageurs may eliminate the effects of limited attention.We examine a decision where attention to new information plays a crucial role, the response to earnings surprises. We compare announcements that occur just before the weekend, on Friday, to announcements on other weekdays. If weekends distract investors and lower the quality of decision-making, the immediate response to Friday earnings surprises should be less pronounced. As investors revisit their decisions in subsequent periods, the information should eventually be incorporated in stock prices. As a result, the delayed response, measured by the post-earnings announcement drift, should be of greater magnitude for Friday announceme...

Earnings Management, Earnings Surprises, and Distressed Firms

“…The earnings management effect dominates the bankruptcy avoidance effect for non-distressed firms. The results in Panel B are consistent with the findings of Dellavigna andPollet (2009) andMichaely, Thaler, andWomack (1995). Our results indicate that investors view distressed and non-distressed firms differently.…”

“…Therefore, the market reaction to an earnings surprise will be smaller for distressed firms than non-distressed firms, given an equal earnings surprise: Next we examine the difference in magnitude for positive and negative earnings surprises of distressed firms. Previous research has shown the price decrease associated with negative events to be larger in absolute terms than the price increase for positive information (Skinner & Sloan, 2002;Dellavigna & Pollet, 2009). One possible reason for this difference is the additional information associated with the firm's inability to meet analyst expectations.…”

Limited attention and the earnings announcement returns of past stock market winners

“…On an annualized basis, the returns we document are much larger than those generated by the postannouncement drift. (Doyle et al 2003), the price impact of Friday earnings releases (Dellavigna and Pollet 2009), observed investor over-optimism with respect to firms with high levels of net operating assets (Hirshleifer et al 2004), and the abnormally high levels of individual investor share purchases around the time of earnings announcements (Lee 1992;Barber and Odean 2008).…”

Limited cognition and clustered asset prices: Evidence from betting markets

“…This literature includes, among others, DellaVigna and Pollet (2009) and Hirshleifer, Lim, and Teoh (2009). These studies present evidence to suggest that mispricing (i.e., the post-earnings announcement drift) is more pronounced when traders are otherwise distracted, either because the weekend is imminent, or because there are a large number of announcements on the same day.…”