When Good News is Not so Good: Economy‐Wide Uncertainty and Stock Returns

23 Pages Posted: 24 Dec 2014

Multiple version iconThere are 2 versions of this paper

Date Written: November/December 2014


This paper shows that variation in economy‐wide uncertainty causes asymmetric stock price responses to firm earnings surprises. The uncertainty that attends bad earnings news that arrives during expansions with greater economy‐wide uncertainty occasions larger price declines. This is because news inconsistent with investors’ prior beliefs about the state of the economy increases uncertainty, which amplifies the negative cash flow effects contained in bad earnings news. Asymmetrically, the positive cash flow effect of good earnings news that arrives during recessions is offset by increased investor uncertainty, which results in relatively smaller price reactions to the good news. This is consistent with Veronesi's rational expectations equilibrium model, which shows that investors demand higher expected returns in the face of greater uncertainty.

Keywords: earnings announcements, stock price response, economy‐wide uncertainty, beta

Suggested Citation

Choi, Hae Mi, When Good News is Not so Good: Economy‐Wide Uncertainty and Stock Returns (November/December 2014). Journal of Business Finance & Accounting, Vol. 41, Issue 9-10, pp. 1101-1123, 2014, Available at SSRN: https://ssrn.com/abstract=2542434 or http://dx.doi.org/10.1111/jbfa.12096

Hae Mi Choi (Contact Author)

Loyola University Chicago ( email )

25 East Pearson Street
Chicago, IL 60611
United States

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