Earnings Announcement Return Extrapolation

62 Pages Posted: 22 Jan 2016 Last revised: 4 Sep 2020

See all articles by Aytekin Ertan

Aytekin Ertan

London Business School

Stephen A. Karolyi

Office of the Comptroller of the Currency

Peter Kelly

University of Notre Dame

Robert C. Stoumbos

Columbia University - Columbia Business School

Date Written: May 25, 2019


We propose that extrapolative beliefs about earnings announcement (EA) returns may contribute to our understanding of EA return patterns. We construct a theoretically-motivated measure of extrapolative investors’ expectations based on a stock’s recent history of EA returns. We then show that this measure explains cross-sectional variation in stock returns and investor behavior around EAs. Stocks expected to have high EA returns according to our measure experience predictable increases in prices before EAs and predictable decreases afterwards. These patterns are economically significant: investors that buy (sell) a portfolio that is long firms with high recent EA returns and short firms with low recent EA returns in the pre-EA (post-EA) period earn daily five-factor abnormal returns of 16.1 bps (18.3 bps). Using individual investor trades data and a measure of institutional trading, we find that individual and institutional investors are more likely to purchase stocks with high recent EA returns, consistent with at least a subset of investors forming extrapolative beliefs about EA returns.

Keywords: return extrapolation, earnings announcements, expectation formation

JEL Classification: G4, G12, M41

Suggested Citation

Ertan, Aytekin and Karolyi, Stephen A. and Kelly, Peter and Stoumbos, Robert C., Earnings Announcement Return Extrapolation (May 25, 2019). Available at SSRN: https://ssrn.com/abstract=2720573 or http://dx.doi.org/10.2139/ssrn.2720573

Aytekin Ertan

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
00442070008131 (Phone)

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

Stephen A. Karolyi

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Peter Kelly (Contact Author)

University of Notre Dame ( email )

251 Mendoza
South Bend, IN 46637
United States

Robert C. Stoumbos

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics