Presentation Slides for 'Driven to Distraction: Extraneous Events and Underreaction to Earnings News'
27 Pages Posted: 19 Jun 2018
Date Written: September 27, 2007
Psychological evidence indicates that it is hard to process multiple stimuli and perform multiple tasks at the same time. This paper tests the investor distraction hypothesis, which holds that the arrival of extraneous news causes trading and market prices to react sluggishly to relevant news about a firm. Our test focuses on the competition for investor attention between a firm's earnings announcements and the earnings announcements of other firms. We find that the immediate stock price and volume reaction to a firm's earnings surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day. Distracting news has a stronger effect on firms that receive positive than negative earnings surprises. Industry-unrelated news has a stronger distracting effect than related news. A trading strategy that exploits post-earnings announcement drift is unprofitable for announcements made on days with little competing news.
Link to the paper: https://ssrn.com/abstract=3195322
Keywords: limited attention, behavioral finance, investor psychology, capital markets, post-earnings announcement drift, market efficiency
JEL Classification: G12, G14, M41, M45
Suggested Citation: Suggested Citation