Individual Investor Trading and Return Patterns Around Earnings Announcements
University of Rochester - Simon School of Business; CEPR
San Francisco State University
Cornell University - Samuel Curtis Johnson Graduate School of Management
University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. DP8259
This paper documents evidence consistent with informed trading by individual investors around earnings announcements using a unique dataset of NYSE stocks. We show that intense aggregate individual investor buying (selling) predicts large positive (negative) abnormal returns on and after earnings announcement dates. We decompose the abnormal returns into a component that is attributed to risk-averse liquidity provision and a component that is attributed to private information or skill, and show that about half of the abnormal returns in the three months following the event can be attributed to private information. We also examine the behavior of individuals after the earnings announcement and find that they trade in the opposite direction to both pre-event returns (i.e., exhibit "contrarian" behavior) and the earnings surprise (i.e., exhibit "news-contrarian" behavior). The latter behavior, which could be consistent with profit-taking, has the potential to slow down the adjustment of prices to earnings news and contribute to the post-earnings announcement drift.
Number of Pages in PDF File: 55
Keywords: earnings announcement, individual investors
JEL Classification: G11, G14working papers series
Date posted: March 14, 2011
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