Do Bright-Line Earnings Surprises Really Affect Stock Price Reactions?

Management Science, Forthcoming

Posted: 13 Apr 2016

See all articles by Jeffery S. Abarbanell

Jeffery S. Abarbanell

University of North Carolina (UNC) at Chapel Hill - Finance Area

Hyungshin Park

Kennesaw State University - Michael J. Coles College of Business

Date Written: October 2015

Abstract

Several influential studies have concluded that earnings surprises just to the right or to the left of a hypothesized bright line produce distinct price reactions compared to the surrounding earnings surprises because they convey special meaning. In this study, we examine whether previous inferences of asymmetric stock price reactions to bright-line surprises are observed when empirical tests are designed to be consistent with a rational expectations equilibrium. Focusing on a small range of earnings surprises around hypothesized bright lines, we find no evidence of asymmetric price reactions once investors’ ex ante expectation of bias in earnings surprises is controlled. Results from additional tests yield support for the external validity of the theoretical framework underlying our bright-line pricing tests. Our findings suggest simple refinements to traditional bins-comparison and regression tests for asymmetric price reactions to bright-line earnings surprises, which account for necessary conditions implied by a rational expectations equilibrium.

Keywords: rational expectations; bright-line; asymmetry; rewards and penalties; meet or beat

JEL Classification: C13, D84, G14

Suggested Citation

Abarbanell, Jeffery S. and Park, Hyungshin, Do Bright-Line Earnings Surprises Really Affect Stock Price Reactions? (October 2015). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2758072

Jeffery S. Abarbanell

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Hyungshin Park (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

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