Investor Preference and Stock Price Underreaction: Evidence from Post Earnings Announcement Drift

57 Pages Posted: 29 Aug 2015 Last revised: 7 Nov 2017

See all articles by Yawen Jiao

Yawen Jiao

University of California, Riverside

Date Written: October 24, 2017

Abstract

This paper shows investors’ lottery preference can attenuate price underreaction to extreme good earnings news. Such news reaffirms investors’ preference for stocks with strong ex ante lottery-like features, thereby accelerating price adjustments. We find that PEAD attenuates for stocks with high expected skewness and extreme good earnings news. Consistent with its reaffirmation role, extreme good news strengthens the predictive power of expected skewness for highly right-skewed stocks’ future skewness. Individual investors buy more right-skewed stocks upon extreme good earnings news than other stocks and the attenuation of PEAD is concentrated in stocks with large individual net-buys. We also find a feedback loop of skewness preference: the reaffirmation of preference is associated with stronger short term price reactions to earnings news; these reactions predict greater future skewness, i.e., the stock becomes even more attractive to skewness preferring investors after earnings news.

Keywords: PEAD; lottery-like stocks; expected skewness; individual investors

JEL Classification: G14; G02; G11

Suggested Citation

Jiao, Yawen, Investor Preference and Stock Price Underreaction: Evidence from Post Earnings Announcement Drift (October 24, 2017). Available at SSRN: https://ssrn.com/abstract=2653068 or http://dx.doi.org/10.2139/ssrn.2653068

Yawen Jiao (Contact Author)

University of California, Riverside ( email )

Riverside, CA 92521
United States

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