Perceived Firm Trustworthiness and Market Underreaction to Earnings News

58 Pages Posted: 2 Jan 2015 Last revised: 29 May 2017

See all articles by Jay Jung

Jay Jung

City, University of London - Cass Business School

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School

Sonya S. Lim

DePaul University - Department of Finance

Choong-Yuel Yoo

KAIST College of Business

Date Written: May 27, 2017

Abstract

We investigate whether investors’ perception of a firm’s trustworthiness affects underreaction to earnings news. We develop a model that predicts how trust helps explain underreaction to news, and test this prediction under three different empirical settings where a firm’s perceived trustworthiness is particularly acknowledged or at risk: a firm’s involvement in socially responsible activities, inclusion in Forbes’ list of “Americas’ 100 Most Trustworthy Companies,” and issuance of accounting restatement. Consistent with the prediction, we find that underreaction to earnings news is stronger when the firm is perceived to be less trustworthy by investors. This result is particularly pronounced for firms with poor earnings quality, low institutional ownership, positive R&D spending, good earnings news, and during the period of financial crisis and high economic uncertainty. We also find that the effect of a firm’s perceived trustworthiness is distinct from the effect of generalized trusting attitudes of investors.

Keywords: Trust, Trustworthiness, Restatement, Corporate Social Responsibility, Post-Earnings Announcement Drift

JEL Classification: G12, G14, M40

Suggested Citation

Jung, Jay Heon and Kang, Jun-Koo and Lim, Sonya S. and Yoo, Choong-Yuel, Perceived Firm Trustworthiness and Market Underreaction to Earnings News (May 27, 2017). Available at SSRN: https://ssrn.com/abstract=2544247 or http://dx.doi.org/10.2139/ssrn.2544247

Jay Heon Jung (Contact Author)

City, University of London - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.jayheonjung.com

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Sonya S. Lim

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://sites.google.com/site/sonyalim/

Choong-Yuel Yoo

KAIST College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul, 02455
Korea, Republic of (South Korea)

HOME PAGE: http://www.business.kaist.edu/faculty/cyoo

Register to save articles to
your library

Register

Paper statistics

Downloads
337
Abstract Views
1,834
rank
88,795
PlumX Metrics