Does firm life cycle stage affect investor perceptions? Evidence from earnings announcement reactions

Andy Fodor, Kelley Bergsma Lovelace, Vijay Singal and Jitendra Tayal ()
Additional contact information
Andy Fodor: Ohio University
Kelley Bergsma Lovelace: Ohio University
Vijay Singal: Pamplin College of Business at Virginia Tech
Jitendra Tayal: Ohio University

Review of Accounting Studies, 2024, vol. 29, issue 2, No 3, 1039-1096

Abstract: Abstract This paper argues that firms in certain life cycle stages may be more subjectively valued by individual investors, leading to an optimistic bias in stock prices that is subsequently corrected upon the release of earnings news. Using a cash flow-based life cycle stage classification, introduction and decline stage companies exhibit three-day cumulative abnormal returns (CARs) around earnings announcements that are at least 112 bps lower than firms in growth, maturity, and shake-out stages. Specifically, introduction and decline stage stocks exhibit less positive reactions to positive earnings surprises and more negative reactions to negative earnings surprises relative to companies in other life cycle stages. Lottery stocks’ excess returns around earnings announcements (Liu et al. in Journal of Financial Economics 138: 789–817, 2020) also vary based on firm life cycle stage. Our findings suggest that individual investors’ optimistic expectations for introduction and decline stage stocks are met with disappointment when value-relevant earnings news is released. This study demonstrates that firm life cycle stage has real implications for stock price reactions to earnings announcements.

Keywords: Earnings announcements; Firm life cycle stage; Lottery; Returns (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 M41 (search for similar items in EconPapers)
Date: 2024
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-022-09749-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:reaccs:v:29:y:2024:i:2:d:10.1007_s11142-022-09749-2

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-022-09749-2

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().