Famous Firms, Earnings Clusters, and the Stock Market

Citation:

Yixin Chen, Randolph Cohen, and Zixuan (Kevin) Wang. Working Paper. “Famous Firms, Earnings Clusters, and the Stock Market”. Copy at https://j.mp/2HspxQz
eac.pdf1.11 MB

Abstract:

We show that much of the market premium for the year occurs on a handful of days,
identifiable well in advance, on which several of the market’s most famous, high-media-attention firms simultaneously announce earnings after the market close. Puzzlingly, the
market surges occur during the 24 hours prior to the earnings announcements, from close
to close. Since there is no overlap between the price increase period and the information
revelation, the high returns do not appear to represent a risk premium, and our tests seem
to rule out information-leakage explanations. Deepening the puzzle, the market delivers
high returns only prior to post-close earnings-announcement clusters, not in advance of
clusters that occur in the pre-open period. In addition to being economically large and
easily tradeable, the effect is statistically significant, and the results hold in all subperiods
in our sample. We argue that the best explanation for our findings is that of Miller (1977)
as extended by Hong and Stein (2007): when over a short “attention” period difference of
opinion combines with short-sale constraints, prices will rise as optimists buy while pessimists cannot sell.

Last updated on 10/28/2020