Earnings Announcements and Systematic Risk

Abstract:     
Firms enjoy high returns at times when they are scheduled to report earnings. We find that this earnings announcement premium is extremely persistent across stocks over horizons going up to 20 years, and that early (late) announcers earn higher (lower) abnormal returns. We propose a risk-based explanation for the phenomenon, which is based on the observation that investors use announcements to revise their expectations for non-announcing firms, but can only do so imperfectly. In support of our hypothesis, we find that a portfolio tracking the performance of earnings announcers predicts aggregate earnings growth, while the overall stock market does not. Earnings announcement risk also appears to be priced. Earnings announcement betas explain 37% of the cross-sectional variation in average returns of portfolios sorted on book-to-market, size, and short-run and long-run returns, and the implied announcement risk premium is consistent with the observed one. Furthermore, none of the 40 test portfolios exhibit abnormal performance when we include the announcement portfolio return as a factor.

Number of Pages in PDF File: 59

Keywords: G12

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

working papers series