Costly Information Processing: Evidence from Earnings Announcements
University of California, San Diego (UCSD) - Rady School of Management
January 18, 2008
AFA 2009 San Francisco Meetings Paper
I examine the role of information processing costs on post earnings announcement drift. I distinguish between hard information - quantitative information that is more easily processed - and soft information which has higher processing costs. I find that qualitative earnings information has additional predictability for asset prices beyond the predictability in quantitative information. I also find that qualitative information has greater predictability for returns at longer horizons, suggesting that frictions in information processing generate price drift. Using a tool from natural language processing called typed dependency parsing, I demonstrate that qualitative information relating to positive fundamentals and future performance is the most difficult information to process.
Number of Pages in PDF File: 49
Keywords: role of media in finance
Date posted: March 21, 2008