The Evolution of Market Price Efficiency Around Earnings News
36 Pages Posted: 6 Feb 2018 Last revised: 6 Dec 2018
Date Written: November 18, 2018
This paper studies the evolution of market price efficiency around earnings announcements over 40 years. Following earnings surprises, post-earnings announcement drifts are no longer present in the most recent data. Stock prices on announcements gradually become more responsive to earnings surprises over time and this is not explained by a decline in pre-announcement drifts. Results from unbiasedness regressions show that prices on announcements approach martingale (increase in the informational efficiency) and better reflect future prices (increase in informativeness). Significant changes in disclosure on announcements between 2001 and 2005 correspond to a substantial increase in price informativeness. These results have broad implications for firm managers relying on markets to produce price information.
Keywords: earnings announcements, market efficiency, price discovery, price informativeness
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation