Does the Market Overweight Imprecise Information?: Evidence from Customer Earnings Announcements

Posted: 15 Feb 2014 Last revised: 12 May 2014

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

John Daniel Eshleman

Rutgers - Camden

Date Written: May 9, 2014

Abstract

We examine how supplier-firm shareholders respond to the earnings announcements of their major customers to test the moderated confidence hypothesis, which predicts overreaction to imprecise signals. In our setting, the moderated confidence hypothesis predicts that supplier shareholders will overreact to customer earnings news because that news contains imprecise information about the suppliers’ future cash flows. We find evidence that supplier earnings announcement abnormal returns are negatively correlated with supplier abnormal returns at the earlier customers’ earnings announcements, consistent with supplier overreaction. We also find evidence that the overreaction declines with the strength of the economic ties between the supplier and the customer.

Keywords: Mispricing, Price Discovery, Information Transfers, Supply Chain

JEL Classification: G14, D80, M41

Suggested Citation

Cheng, C.S. Agnes and Eshleman, John Daniel, Does the Market Overweight Imprecise Information?: Evidence from Customer Earnings Announcements (May 9, 2014). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2396054

C.S. Agnes Cheng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

John Daniel Eshleman

Rutgers - Camden ( email )

Camden, NJ 08102
United States

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