Firm-Level Information Ambiguity and the Earnings Announcement Premium

35 Pages Posted: 27 Jul 2018

See all articles by Mengxi (Maggie) Liu

Mengxi (Maggie) Liu

University of Queensland, Business School

Kam Fong Chan

The University of Western Australia; Financial Research Network (FIRN)

Robert W. Faff

University of Queensland

Date Written: January 10, 2018

Abstract

We study the role of firm ambiguity on stock price reaction to earnings announcements. By using the firm’s variance risk premium (VRP) prior to earnings news arrivals as a proxy for firm-level information ambiguity, we provide evidence that this “micro” form of ambiguity has a significant positive impact on the earnings announcement market reaction. On average, a unit standard deviation increase in the firm’s VRP is associated with 0.33% increase in the firm’s three-day cumulative abnormal returns. We further show that the firm ambiguity is more influential than the market-level ambiguity in affecting the earnings announcement premium. Finally, consistent with predictions of the behavioural and regime-switching models of Barberis et al. (1998) and Veronesi (1999), we find that the news asymmetric effect on stock price returns decreases with firm-level ambiguity.

Keywords: Ambiguity; Variance risk premium; Earnings announcement premium

JEL Classification: C51; G12; G14; M41

Suggested Citation

Liu, Mengxi (Maggie) and Chan, Kam Fong and Faff, Robert W., Firm-Level Information Ambiguity and the Earnings Announcement Premium (January 10, 2018). Available at SSRN: https://ssrn.com/abstract=3221030 or http://dx.doi.org/10.2139/ssrn.3221030

Mengxi (Maggie) Liu (Contact Author)

University of Queensland, Business School ( email )

St Lucia
Australia

Kam Fong Chan

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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