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Earnings Announcements and Systematic Risk

Pavel G. Savor

Temple University - Fox School of Business

Mungo Ivor Wilson

University of Oxford - Said Business School

September 20, 2014

AFA 2012 Chicago Meetings Paper

Firms enjoy high returns at times when they are scheduled to report earnings. A simple strategy that buys all announcers and short-sells all other stocks earns an annualized return of 9.9%, with a Sharpe ratio that is significantly higher than that of value and momentum strategies. Standard pricing models cannot explain this performance, with the strategy's abnormal return typically almost equal to its raw return. We propose a risk-based explanation for this phenomenon, in which investors use announcements to revise their earnings expectations for non-announcing firms, but can only do so imperfectly. Consequently, the covariance between firm-specific and market cash-flow news spikes around announcements, making announcers especially risky. Consistent with our hypothesis, we find that returns of earnings announcers robustly predict aggregate earnings growth. Furthermore, non-announcing firms respond to announcements in a manner consistent with our model, both across time and cross-sectionally. We also show that the announcement premium is extremely persistent across stocks, and that early (late) announcers earn higher (lower) returns. Finally, exposure to earnings announcement risk is priced in the cross-section.

Number of Pages in PDF File: 83

Keywords: G12

JEL Classification: Asset Pricing, Risk Premia, Earnings, Announcements

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Date posted: March 17, 2011 ; Last revised: September 21, 2014

Suggested Citation

Savor, Pavel G. and Wilson, Mungo Ivor, Earnings Announcements and Systematic Risk (September 20, 2014). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1786308 or http://dx.doi.org/10.2139/ssrn.1786308

Contact Information

Pavel G. Savor (Contact Author)
Temple University - Fox School of Business ( email )
Fox School of Business and Management
Philadelphia, PA 19122
United States

Mungo Ivor Wilson
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288914 (Phone)
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References:  71
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