An analytical measure of market underreaction to earnings news

Kee H. Chung, Oliver Kim, Steve C. Lim and Sean Yang

International Review of Economics & Finance, 2019, vol. 64, issue C, 612-624

Abstract: Prior studies have provided a number of possible explanations for delayed market reactions to earnings announcements. However, there has been relatively little effort to predict the magnitude of the post-earnings announcement drift (PEAD). We show that the squared correlation coefficient (ρ2) between order imbalance and earnings surprise determines the magnitude of market underreaction to earnings surprises and PEAD=k⋅ρ2, where k is the information content of earnings. We discuss several testable implications of our analytical results, including a model-implied measure of information asymmetry that arises from the differential information processing ability of traders.

Keywords: Strategic trading; Information asymmetry; Information precision; Liquidity demander; Liquidity provider; Order imbalance; Information content; Price impact (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056018310281
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:64:y:2019:i:c:p:612-624

DOI: 10.1016/j.iref.2019.08.005

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().