Limited Attention and the Earnings Announcement Returns of Past Stock Market Winners

43 Pages Posted: 5 May 2008 Last revised: 9 Nov 2008

See all articles by David Aboody

David Aboody

University of California, Los Angeles (UCLA) - Accounting Area

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Brett Trueman

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: October 2008

Abstract

We document that stocks with the strongest prior 12-month returns experience a significant average market-adjusted return of 1.58 percent during the five trading days before their earnings announcements and a significant average market-adjusted return of 1.86 percent in the five trading days afterward. These returns remain significant even after accounting for transactions costs. We empirically test two possible explanations for these anomalous returns. The first is that unexpectedly positive news hits the market over the few days prior to these firms' earnings announcements, and that unexpectedly negative news comes out just afterwards. The second possibility is that stocks with sharp run-ups tend to attract individual investors' attention, and investment dollars, particularly before their earnings announcements. We do not find evidence for an information-based explanation; however, our analysis suggests the possibility that the trading decisions of individual investors are at least partly responsible for the return pattern we observe.

Keywords: earnings announcement, anomaly, limited attention, return

JEL Classification: M41, G14

Suggested Citation

Aboody, David and Lehavy, Reuven and Trueman, Brett, Limited Attention and the Earnings Announcement Returns of Past Stock Market Winners (October 2008). Available at SSRN: https://ssrn.com/abstract=1127764 or http://dx.doi.org/10.2139/ssrn.1127764

David Aboody

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-825-3393 (Phone)
310-267-2193 (Fax)

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

Brett Trueman (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-4720 (Phone)
310-267-2193 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,354
Abstract Views
5,049
rank
13,689
PlumX Metrics