The Stock Price Effects of Changes in Dispersion of Investor Beliefs During Earnings Announcements
Lynn L. Rees
Texas A&M University - Department of Accounting
Wayne B. Thomas
University of Oklahoma - Michael F. Price College of Business
Review of Accounting Studies, Forthcoming
Existing research provides competing theories about how dispersion of investor beliefs might affect stock prices. We measure changes in dispersion of investor beliefs around earnings announcements using changes in the dispersion of individual analysts' forecasts. We find that the three-day market response to earnings announcements is negatively associated with changes in dispersion, consistent with the cost of capital hypothesis. The results hold after controlling for the current earnings surprise, forecast revisions of future earnings, and reported earnings relative to various earnings thresholds. Our study provides new insight about the information contained in earnings announcements that is incremental to the magnitude and timing of cash flows.
Keywords: Dispersion of beliefs, cost of capital, equity call option, market friction, announcement returns
JEL Classification: G12, G14, G29, M41Accepted Paper Series
Date posted: April 28, 2008
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