Inconsistent Signals, Earnings Announcements and Market Uncertainty

ABACUS, Forthcoming

41 Pages Posted: 9 Jan 2017 Last revised: 14 Mar 2019

See all articles by Wen He

Wen He

University of Queensland - Business School

Andrew B. Jackson

UNSW Australia Business School, School of Accounting

Kevin Liang

UNSW Business School

Date Written: February 2019

Abstract

We test the proposition in Johnstone (2016) that new information may lead to higher, rather than lower, uncertainty about firms’ future payoffs. Based on the Bayesian rule, we hypothesize earnings news that is inconsistent with investors’ prior belief will lead to higher market uncertainty. Using earnings signals in the past few quarters to proxy for investors’ prior belief, we find supporting evidence that, relative to consistent earnings news, inconsistent news results in an increase in market uncertainty measured by implied volatility. Inconsistent earnings news has a larger effect on market uncertainty when prior beliefs are stronger and when the news is negative. Overall, our evidence highlights the importance of prior belief and inconsistent signals in understanding the effect of earnings news on market uncertainty.

Keywords: Accounting Disclosure, Earnings News, Implied Volatility, Information, Market Uncertainty

JEL Classification: G13, G14, M41

Suggested Citation

He, Wen and Jackson, Andrew B. and Liang, Kevin, Inconsistent Signals, Earnings Announcements and Market Uncertainty (February 2019). ABACUS, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2894583 or http://dx.doi.org/10.2139/ssrn.2894583

Wen He

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Andrew B. Jackson (Contact Author)

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

Kevin Liang

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

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