Revealing Downturns

51 Pages Posted: 17 Nov 2012 Last revised: 16 Jan 2018

See all articles by Martin C. Schmalz

Martin C. Schmalz

CEPR; University of Oxford - Finance; CESifo; European Corporate Governance Institute (ECGI)

Sergey Zhuk

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2018


When Bayesian risk-averse investors are uncertain about their assets' cash flows' exposure to systematic risk, stock prices react more to news in downturns than in upturns, implying higher volatility in downturns and negatively skewed returns. The reason is that, in good times, less desirable assets with low average cash flows and high loading on market risk perform similar to more desirable assets with high average cash flows and low market risk, rendering them difficult to distinguish. However, their relative fundamental performance diverges in downturns, enabling better inference. Consistent with these predictions, stocks' reaction to earnings news is up to 70% stronger in downturns than in upturns.

Appendix is available at:

Keywords: Learning, Asymmetry, Business Cycle, Earnings Response

JEL Classification: G00, G10, G12, G14

Suggested Citation

Schmalz, Martin C. and Schmalz, Martin C. and Zhuk, Sergey, Revealing Downturns (January 15, 2018). Available at SSRN: or

Martin C. Schmalz (Contact Author)

CEPR ( email )

United Kingdom

University of Oxford - Finance ( email )

United States

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Sergey Zhuk

affiliation not provided to SSRN

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics