Headline Salience and Over- and Underreactions to Earnings

Abstract:     
If investors have limited attention, then greater salience of earnings news implies a stronger announcement date market reaction, and a weaker post-earnings announcement drift (PEAD). Using a new measure, SALIENCE, calculated as the number of quantitative items in an earnings press release headline, we find strong evidence consistent with investor limited attention. Higher SALIENCE good news firms have stronger positive announcement reaction and a post-earnings announcement reversal (PEAR). Higher SALIENCE good news firms also have higher announced earnings and operating cash flows, more likely profit than loss firms, lower earnings persistence, and following the announcement greater insider selling and short-selling. These findings are consistent with managerial opportunistic headlining of financial information in the earnings press release to incite overoptimism about the earnings news in investors with limited attention.

Number of Pages in PDF File: 58

Keywords: qualitative disclosure, disclosure management, market efficiency, limited attention, behavioral finance, investor psychology, post-earnings announcement drift

JEL Classification: D21, G12, G14, G18, G38, M41

working papers series