Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance
Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)
Massachusetts Institute of Technology (MIT) - Sloan School of Management
Jerold B. Warner
University of Rochester – Simon Business School
February 1, 2003
MIT Sloan Working Paper No. 4284-03
We study the stock market reaction to aggregate earnings news. Previous research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. We find that the relation between returns and earnings is substantially different in aggregate data. First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns are negatively correlated with concurrent earnings; over the last 30 years, stock prices increased 6.5% in quarters with negative earnings growth and only 1.9% otherwise. This finding suggests that earnings and discount rates move together over time, and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns.
Number of Pages in PDF File: 42
JEL Classification: G12, G14, M41
Date posted: January 10, 2005 ; Last revised: February 24, 2009
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