Asymmetric Stock Price Reaction to Good vs. Bad Earnings News: Short Sale Constraints vs. Managers’ Incentives to Withhold Bad News

Posted: 2 Feb 2011 Last revised: 6 Feb 2017

See all articles by Musa Subasi

Musa Subasi

University of Maryland-College Park - Robert H. Smith School of Business

Date Written: July 7, 2011

Abstract

The negative stock price reaction to bad news disclosures is much larger in magnitude than the positive stock price reaction to good news disclosures. Diamond and Verrecchia (1987) posit that short-selling restrictions cause this asymmetry while Kothari, Shu, and Wysocki (2009) interpret it as evidence that managers withhold bad news and leak good news. This study explores the merits of these two explanations in a joint framework. Two popular measures of short-sale constraints based on institutional ownership and short interest ratios have no incremental power in explaining the asymmetry when factors that influence managers’ incentives to disclose news in a timely fashion are controlled for. Only, the Prob-measure advocated by Ali and Trombley (2006) is incrementally significant in explaining the larger stock price reaction to bad news. Moreover, the fraction of bad news reflected in stock prices prior to bad news disclosures is significantly higher for more short-sale constrained stocks.

Keywords: Asymmetric stock price reaction; short-sale constraints; managerial incentives

JEL Classification: D82, G14, M40

Suggested Citation

Subasi, Musa, Asymmetric Stock Price Reaction to Good vs. Bad Earnings News: Short Sale Constraints vs. Managers’ Incentives to Withhold Bad News (July 7, 2011). Available at SSRN: https://ssrn.com/abstract=1470308 or http://dx.doi.org/10.2139/ssrn.1470308

Musa Subasi (Contact Author)

University of Maryland-College Park - Robert H. Smith School of Business ( email )

University of Maryland-College Park
4332N Van Munching Hall
College Park, MD 20742
United States
301-314-1055 (Phone)

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