Naive Investors, Earnings Announcements, and Stock Price Movements

30 Pages Posted: 11 Nov 2008

See all articles by Richard R. Mendenhall

Richard R. Mendenhall

University of Notre Dame - Department of Finance

Date Written: January 1995

Abstract

This paper addresses the issue of whether investors with â¬Snaïveâ¬? earnings expectations (i.e., earnings forecasts that are systematically less accurate than other publicly available predictions) have sufficient market power to affect common stock prices. The results clearly indicate that when security analysts predict quarterly earnings increases (decreases), from the same fiscal quarter of the prior year, that the abnormal return around the upcoming earnings announcement tends to be positive. When the data are formed into 50 portfolios, about 66% of the abnormal return variation around earnings announcements is explained by the predicted earnings change. This is surprising since the forecasts used are dated from one to thirteen weeks before the earnings announcement.

Suggested Citation

Mendenhall, Richard R., Naive Investors, Earnings Announcements, and Stock Price Movements (January 1995). NYU Working Paper No. FIN-94-047. Available at SSRN: https://ssrn.com/abstract=1299493

Richard R. Mendenhall (Contact Author)

University of Notre Dame - Department of Finance ( email )

330 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6076 (Phone)
574-631-5255 (Fax)

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