Sell on the news: Differences of opinion, short-sales constraints, and returns around earnings announcements☆

Berkman, Henk; Dimitrov, Valentin; Jain, Prem C.; Koch, Paul D.; Tice, Sheri

doi:10.1016/j.jfineco.2008.04.009

Cited by 291 publications

(263 citation statements)

References 53 publications

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“…Consistent with this conjecture, growth stocks and stocks subject to high differences of opinion tend to earn significantly lower returns around earnings announcements (La Porta et al (1997), Berkman, Dimitrov, Jain, Koch, and Tice (2009)). However, prior investor sentiment research (Baker and Wurgler (2006)) finds only weak evidence that the average earnings announcement return is inversely related to sentiment for the subset of firms that are overvalued (undervalued) when sentiment is high (low).…”

Section: Introductionmentioning

confidence: 65%

“…Finally, Berkman et al (2009) find that earnings announcements reduce overvaluation in stocks subject to high short sale constraints and high differences of opinion, or in other words in stocks for which valuation difficulty is identifiably high. Our findings suggest that earnings guidance events play an important role in mitigating overvaluation driven by a different source (investor sentiment), suggesting that earnings expectations likely play a broad role in overvaluation and that the disclosure of earnings-related information plays a broad role in mitigating this problem.…”

Section: Introductionmentioning

confidence: 89%

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The Party's Over: The Role of Earnings Guidance in Resolving Sentiment-Driven Overvaluation

Seybert

Yang

2011

SSRN Journal

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This paper shows that an important link between investor sentiment and firm overvaluation is optimistic earnings expectations, and that management earnings guidance helps resolve sentiment-driven overvaluation. Using previously identified firm characteristics, we find that most of the negative returns to uncertain firms in months following high-sentiment periods fall within the three-day window around the issuance of management earnings guidance. Comparisons of guidance months to nonguidance months show that guidance issuance affects the magnitude and not just the daily distribution of negative returns. There is also some evidence of negative returns around earnings announcements for firms that previously issued guidance, suggesting that guidance does not entirely correct optimistic earnings expectations. To provide additional insight into the strength of the guidance effect, we show that the market reacts more strongly to surprises, particularly negative surprises, following high-sentiment periods. Finally, firms with higher transient institutional ownership are less likely to guide, and their guidance is less likely to contain bad news following high-sentiment periods, indicating that managers with a short-term focus are hesitant to correct optimistic market expectations. THE PARTY'S OVER: THE ROLE OF EARNINGS GUIDANCE IN RESOLVING SENTIMENT-DRIVEN OVERVALUATION AbstractThis paper shows that an important link between investor sentiment and firm overvaluation is optimistic earnings expectations, and that management earnings guidance aids in resolving sentimentdriven overvaluation. Using the firm characteristics identified by Baker and Wurgler (2006), we find that most of the negative returns to uncertain firms in months following high sentiment periods fall within the three-day window around management earnings guidance issuance. Comparisons of guidance months to non-guidance months show that guidance issuance affects the magnitude and not just the daily distribution of negative returns. There is also some evidence of negative returns around earnings announcements for firms that previously issued guidance, suggesting that guidance does not entirely correct optimistic earnings expectations. To provide additional insight into the strength of the guidance effect, we show that the market reacts more strongly to surprises and particularly negative surprises following high sentiment periods. Finally, firms with higher transient institutional ownership are less likely to guide and their guidance is less likely to contain bad news following high sentiment periods, indicating that managers with a short-term focus are hesitant to correct optimistic market expectations.

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Section: Introductionmentioning

confidence: 65%

Section: Introductionmentioning

confidence: 89%

The Party's Over: The Role of Earnings Guidance in Resolving Sentiment-Driven Overvaluation

Seybert

Yang

2011

SSRN Journal

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“…This evidence is consistent with Williams (1977), who predicts a positive association between future stock returns and divergence of opinion. In a more recent paper, Berkman et al (2009) examine whether stocks with high differences of opinion have lower returns around earnings announcements. 9 DATA AND RESEARCH DESIGN The data used in this study are from two sources.…”

Section: Divergence Of Opinion and Peadmentioning

confidence: 99%

“…that volume is higher around earnings announcements than in non-announcement periods, in support of their prediction. Berkman et al (2009) use five proxies for divergence of opinion (earnings volatility, return volatility, dispersion of analysts' earnings forecasts, firm age, and share turnover) and find that stocks with a high divergence of opinion among investors have a price run-up prior to earnings announcements followed by a greater price reversal after the announcements. These findings favor Miller's (1977) hypothesis that stock prices which reflect an optimistic bias cannot persist indefinitely, in that periodic announcements that reduce differences of opinion also reduce upward bias in stock prices.…”

Section: Divergence Of Opinion and Peadmentioning

confidence: 99%

Is Post Earnings Announcement Drift A Priced Risk Factor in Emerging Markets? Chinese evidence

Dempsey¹,

2017

ABR

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This study examines the profitability of trading on earnings surprises in the postearnings announcement period for equities listed in the Shanghai and Shenzhen stock exchanges spanning the period 2000 to 2008 when Chinese markets were developing. The paper also examines whether the drift is a priced risk factor. We show that a postearnings announcement drift (PEAD) anomaly exists in China. We document that a hedge strategy of going long on stocks in the highest earnings surprise decile and going short on firms in the lowest earnings surprise decile generates 7.92% excess return in the 60 days following the earnings announcement. We also show that the PEAD is a priced risk factor. Our paper is the first to document that PEAD is systematically priced as a risk factor in stock returns. JEL classification: G11 G14 G15 M41Keywords: Post-earnings announcement drift, Earnings surprise, Divergence of opinion, Asset pricing INTRODUCTIONIn this paper we examine the profitability of trading on earnings surprises in the post-earnings announcement period for equities listed in the Shanghai and Shenzhen stock exchanges spanning the period 2000 to 2008. We also examine whether the PEAD is systematically priced as a risk factor in stock returns. We examine the significance of PEAD in the context of the onefactor and three-factor asset pricing models, as well as the enhanced one-factor and threefactor asset pricing models. We show that stock prices from the Chinese stock market have pronounced delayed reactions to earnings information. Specifically, a hedge strategy of going long the top decile of earnings surprise stocks and short the bottom decile of earnings surprise stocks can generate 7.92% excess return in the 60 days subsequent to earnings announcements. There is evidence that the magnitude of PEAD decreases in the level of market risk and increases in the level of trading volume as a proxy for transaction costs and liquidity. As far as the asset pricing tests are concerned we show that PEAD is a priced risk factor.

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“…Using various proxies for investor disagreement and for the severity of the short-sale constraint, Chen, Hong, and Stein (2001), Diether, Malloy, and Scherbina (2002), and Boehme, Danielsen, and Sorescu (2006) find that high levels of disagreement predict low stock returns for the next few months. Scherbina (2008) and Berkman, Henk, Jain, Koch, and Tice (2009) show that high investor disagreement also lowers returns around earnings announcements. Houge, Loughran, Suchanek, and Yan (2001) show that high lev-els of disagreement help explain the short-run IPO overvaluation and the long-run underperformance, and Loughran and Marietta-Westberg (2005) document the negative relation between disagreement and future stock returns for both IPOs and SEOs.…”

Section: Introductionmentioning

confidence: 99%

Unusual News Flow and the Cross Section of Stock Returns

et al. 2018

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We document that stocks that experience sudden increases in idiosyncratic volatility underperform otherwise similar stocks in the future, and we propose that this phenomenon can be explained by the Miller conjecture [Miller E (1977) Risk, uncertainty, and divergence of opinion. J. Finance 32(4):1151–1168]. We show that volatility shocks can be traced to unusual firm-level news flow, which temporarily increases the level of investor disagreement about the firm value. At the same time, volatility shocks pose a barrier to short selling, preventing pessimistic investors from expressing their views. In the presence of divergent opinions and short-selling constraints, prices initially reflect optimistic views but adjust downward in the future as investors’ opinions converge. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2726 . This paper was accepted by Wei Xiong, finance.

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Sell on the news: Differences of opinion, short-sales constraints, and returns around earnings announcements☆

Cited by 291 publications

References 53 publications

The Party's Over: The Role of Earnings Guidance in Resolving Sentiment-Driven Overvaluation

The Party's Over: The Role of Earnings Guidance in Resolving Sentiment-Driven Overvaluation

Is Post Earnings Announcement Drift A Priced Risk Factor in Emerging Markets? Chinese evidence

Unusual News Flow and the Cross Section of Stock Returns

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