Uncertainty and the Earnings Announcement Premium
55 Pages Posted: 24 Jul 2019 Last revised: 14 Feb 2023
Date Written: February 13, 2023
We test if investors are uncertainty averse about corporate cash flows by considering earnings announcements. Without uncertainty, announcement returns positively predict future investment, but uncertainty can reverse this relationship. Empirically, the earnings announcement return negatively predicts future investment, rejecting expected utility in favor of uncertainty aversion. Earnings announcements, as pure news events, are priced only if investors are uncertainty averse: announcement returns are higher for firms with more dispersed analyst forecasts, greater political risk, small firms, complex firms, and firms listed on NASDAQ or AMEX. Therefore, the earnings announcement return is a noisy signal of firm-specific uncertainty.
Keywords: Ambiguity Aversion, Earnings Announcements, Investment
JEL Classification: D81, G14, G31
Suggested Citation: Suggested Citation