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Headline Salience, Managerial Opportunism, and Over- and Underreactions to Earnings

57 Pages Posted: 7 Jul 2012 Last revised: 23 Jun 2017

Xuan Huang

California State University, Long Beach

Alexander Nekrasov

University of Illinois at Chicago

Siew Hong Teoh

University of California, Irvine - Accounting Area

Date Written: May 17, 2017

Abstract

Limited attention theory predicts that higher salience of earnings news implies a stronger immediate market reaction to earnings news and a weaker post-earnings announcement drift (PEAD) or reversal (PEAR). Using a new measure, SALIENCE, defined as the number of quantitative items in an earnings press release headline, we find strong evidence consistent with salience effects. Higher SALIENCE is associated with stronger announcement reaction and subsequent PEAR. Managers are more likely to choose higher SALIENCE before selling shares in the post-announcement period and when earnings are high but less persistent, and to choose lower SALIENCE before stock option grants. The results are robust to using residual salience and an extended set of control variables. The findings are consistent with managers opportunistically headlining positive financial information in the earnings press release to incite overoptimism in investors with limited attention.

Keywords: qualitative disclosure, disclosure management, market efficiency, limited attention, behavioral finance, investor psychology, post-earnings announcement drift

JEL Classification: D21, G12, G14, G18, G38, M41

Suggested Citation

Huang, Xuan and Nekrasov, Alexander and Teoh, Siew Hong, Headline Salience, Managerial Opportunism, and Over- and Underreactions to Earnings (May 17, 2017). Available at SSRN: https://ssrn.com/abstract=2101887 or http://dx.doi.org/10.2139/ssrn.2101887

Xuan Huang

California State University, Long Beach ( email )

1250 Bellflower Blvd
Long Beach, CA 90064
United States

Alexander Nekrasov

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Siew Hong Teoh (Contact Author)

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

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