The Evolution of Market Price Efficiency Around Earnings News

Abstract

This paper studies the evolution of market price efficiency around earnings announcements over 40 years. Today, the post-earnings announcement drift following earnings surprises is almost extinct. On announcement days, prices now incorporate private information faster, as evidenced by higher idiosyncratic volatility (price nonsynchronicity). Improvements in price efficiency following earnings announcements coincide with the proliferation of newswire coverage and financial regulatory events. In particular, the implementation of the Sarbanes-Oxley Act corresponds to an abrupt and permanent increase in idiosyncratic volatility on announcement days. These findings shed new light on the recent theory of market price efficiency.

Keywords: earnings announcements, idiosyncractic volatility, market efficiency, price discovery

JEL Classification: G10, G12, G14