The Evolution of Market Price Efficiency Around Earnings News

Abstract

This paper studies the speed of price discovery following earnings announcements over 40 years. I use earnings surprises and the idiosyncratic volatility on announcement days to examine the responsiveness of stock prices to earnings news. For all stocks, financial markets have become more efficient at incorporating earnings news rapidly into stock prices over time. In the latter part of the sample period, post-earnings announcement drift is almost extinct. Improvements in the speed of price discovery coincide with the proliferation of news dissemination and to financial regulatory events, which I relate to the recent theory on market price efficiency.

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

JEL Classification: G10, G12, G14