Information Uncertainty and the Reaction of Stock Prices to News

Abstract

We argue that the behavioral theories suggesting that investors underreact to new information yield sharp testable implications concerning the sluggishness with which stock prices react to the arrival of news, and not concerning price continuation patterns, on which most of the literature has focused so far. Specifically, if underreaction is heightened by uncertainty surrounding the firm, then higher uncertainty will cause prices to react more slowly to news, whereas it may, but need not, cause stronger price continuation. Using data on the post-analyst revisions drift and the post-earnings announcement drift we find scarce evidence in support of the thesis that the prices of stocks characterized by high uncertainty react more slowly to news.

Keywords: stock price anomalies, price continuation, price reaction to news

JEL Classification: G11, G14