Does the Market Overweight Imprecise Information?: Evidence from Customer Earnings Announcements
Posted: 15 Feb 2014 Last revised: 12 May 2014
Date Written: May 9, 2014
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: Suggested Citation