The Uncertainty Influence on Earnings Announcement Returns

Sammanfattning: We present evidence that market uncertainty influences the magnitude of the stock return response to earnings announcements. In this paper, we find that investors react more strongly to good news when released in a market of high uncertainty, compared with the same news in a market of low uncertainty. Further, we find that a reversal of the returns occurs within 45 trading days. We relate our findings to behavioural theories, using contrast effects and sentiment models as possible explanations. The previously observed market uncertainty inversely biases the perception of the earnings announcement, and investors mistakenly perceive the good news as better than it actually is, leading to an overreaction that is reflected in the market price.