Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?

Milian, Jonathan A.

doi:10.1111/1475-679x.12070

Cited by 48 publications

(20 citation statements)

References 118 publications

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“…The negative association between non‐GAAP earnings surprises and future earnings announcement returns is also consistent with more general evidence that post‐earnings announcement drift has reversed (i.e., investors overreact instead of underreact to earnings surprises) in recent years (Milian [], Veenman and Verwijmeren []).…”

supporting

confidence: 83%

“…Months before and after this period are dropped out of the investigation because too few observations are available to construct the loss converters portfolio. 40 The negative association between non-GAAP earnings surprises and future earnings announcement returns is also consistent with more general evidence that post-earnings announcement drift has reversed (i.e., investors overreact instead of underreact to earnings surprises) in recent years (Milian [2015], Veenman and Verwijmeren [2018]).…”

Section: Mispricing Testssupporting

confidence: 58%

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Non‐GAAP Earnings Disclosure in Loss Firms

Leung

Veenman

2018

J of Accounting Research

111

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This study examines the incremental information in loss firms’ non‐GAAP earnings disclosures relative to GAAP earnings. Using a large sample obtained through textual analysis and hand‐collection, we posit and find that loss firms’ non‐GAAP earnings exclusions offset the low informativeness of GAAP losses for forecasting and valuation. Loss firms’ non‐GAAP earnings are highly predictive of future performance and are valued by investors, while the expenses excluded from GAAP earnings are not. Additional tests suggest that loss firms disclosing non‐GAAP profits have significantly better future performance than GAAP‐only loss firms and are not overvalued by investors. Comparing non‐GAAP earnings of profitable firms to those of loss firms, we find that loss firms’ non‐GAAP metrics are significantly more predictive and less strategic. We conclude that non‐GAAP earnings disclosures are particularly informative about loss firms and help investors disaggregate losses into components that have differential implications for forecasting and valuation.

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supporting

confidence: 83%

Section: Mispricing Testssupporting

confidence: 58%

Non‐GAAP Earnings Disclosure in Loss Firms

Leung

Veenman

2018

J of Accounting Research

111

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“…The first is that limits on investors' attention prevent them from fully understanding the implication of nonguidance for firm value. Inattention can simply mean that investors are not aware of the information because of their limited capabilities to acquire and process information (e.g., deHaan, Shevlin, and Thornock [2015], Milian [2015], Blankespoor, deHaan, and Marinovic [2020]). Inattention could also reflect "limited strategic thinking."…”

Section: Introductionmentioning

confidence: 99%

The Dog that Did Not Bark: Limited Price Efficiency and Strategic Nondisclosure

Zhou

2020

J of Accounting Research

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Theory posits that investors can rationally infer the implications of strategic nondisclosure for firm value, pressuring managers to disclose information voluntarily. This study documents that the lack of an earnings guidance predicts an abnormal return of −41 basis points around the subsequent quarterly earnings announcement, suggesting that investors do not fully incorporate the implications of nonguidance. Further analyses demonstrate that limitations in price efficiency, driven by investors' limited attention and shortselling constraints, explain the mispricing of nonguidance and are associated * The Wharton School, University of Pennsylvania † Anderson School of Management, University of California at Los Angeles.Accepted by Christian Leuz. We would like to express our special appreciation to Brett Trueman. We appreciate the helpful comments and suggestions of two anonymous referees, with less guidance issuance. Our results collectively highlight limited price efficiency as another friction when studying managers' strategic disclosure decisions. JEL codes: G14; M41

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“…Relatedly, Johnson and Schwartz (2000), Richardson et al (2010), and Chordia et al (2014) find that mispricing related to drifts has declined in recent years, especially among liquid stocks. In fact, there are indications that arbitrage activity has become so aggressive that prices overshoot their efficient levels in some cases (Milian 2015 As discussed earlier, almost all retail marketable (i.e. market or marketable limit) orders are routed by retail brokerages directly to OTC wholesale dealers.…”

Section: The Post-earnings Announcement Drift (Pead)mentioning

confidence: 99%

Off-Exchange Trading and Post Earnings Announcement Drift

2019

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Off-exchange trading, which tends to attract uninformed trades, accounts for about 35 percent of total trading volume today. Taking uninformed trades off exchanges harms liquidity but improves price discovery, indicated by a decline in intraday price inefficiency (deviation of price changes from a random walk). We examine whether it also decreases an accounting inefficiency: investor underreaction to quarterly earnings news. Our results, based on investigation of a large panel of US firms and a natural experiment created by the SEC's Tick Size Pilot program, suggest the opposite conclusion: off-exchange trading increases underreaction to earnings news. The negative effects of off-exchange trading on liquidity (less depth and wider spreads) likely increase arbitrage costs, thereby reducing arbitrage activity that partially corrects underreaction. We find that the positive relation between off-exchange trading and underreaction remains strong even when we control for a host of observable arbitrage cost measures. Levels of off-exchange trading appear to serve as a useful proxy for hard-to-measure arbitrage costs.

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Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?

Cited by 48 publications

References 118 publications

Non‐GAAP Earnings Disclosure in Loss Firms

Non‐GAAP Earnings Disclosure in Loss Firms

The Dog that Did Not Bark: Limited Price Efficiency and Strategic Nondisclosure

Off-Exchange Trading and Post Earnings Announcement Drift

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