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Ambiguity Aversion, Company Size and the Pricing of Earnings ForecastsConstantinos AntoniouUniversity of Exeter - Xfi Centre for Finance and Investment Daniel ReadUniversity of Warwick - Warwick Business School Emilios C. GalariotisAudencia Nantes School of Management November 1, 2010 Abstract: Several authors have reported an unconditional size effect in returns around earnings announcements. In this study we show how this finding can be understood as resulting from ambiguity aversion. We hypothesize that analyst forecasts for smaller companies are relatively more ambiguous; hence they are priced pessimistically by ambiguity-averse investors. As the quarter comes to a close and ambiguity gradually subsides, the stock prices of smaller companies rise to correct this pessimism, creating the size effect. Our results support these hypotheses.
Number of Pages in PDF File: 25 Keywords: Ambiguity aversion, size premium, analyst earnings forecasts. JEL Classification: D03, D81, D84, G11, G14 working papers seriesDate posted: November 2, 2009 ; Last revised: March 9, 2012Suggested CitationContact Information
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