Number Processing Constraints and Earnings News

Stephen Karolyi (), Thomas Ruchti () and Phong Truong ()
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Stephen Karolyi: Office of the Comptroller of the Currency, United States Department of the Treasury, Washington, District of Columbia 20219
Thomas Ruchti: Office of Financial Research, United States Department of the Treasury, Washington, District of Columbia 20005
Phong Truong: Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802

Management Science, 2025, vol. 71, issue 3, 2413-2442

Abstract: Neuroscience shows that human brains are neurologically constrained to process small numbers linearly and large numbers logarithmically, leading to underreactions to larger numbers as their perceived difference becomes smaller. We test this hypothesis in the context of earnings announcements and find that investors respond less in the short term to earnings news for stocks with high earnings per share magnitudes, exacerbating postearnings announcement drift for these stocks. These findings are distinct from and incremental to several risk-based and behavioral explanations, attenuated by robot presence and present in a quasi-experimental design using stock splits. Our evidence suggests that number processing constraints have implications for stock price efficiency.

Keywords: neural constraints; cognitive limitations; number processing; earnings news; earnings response coefficients; post-earnings announcement drift (search for similar items in EconPapers)
Date: 2025
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