The Earnings Announcement Premium as Uncertainty Aversion: Theory and Evidence

46 Pages Posted: 24 Jul 2019 Last revised: 4 Sep 2020

See all articles by David L. Dicks

David L. Dicks

Baylor University - Department of Finance, Insurance & Real Estate

Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate

Date Written: September 4, 2020

Abstract

We argue the earnings announcement premium is a measure of firm-specific uncertainty aversion. Our stylized model shows earnings announcements, as pure news events, are priced only if investors are uncertainty averse; further, the earnings announcement return is negatively correlated to future investment only if there is time-varying uncertainty. Consistent with the model, we empirically show that when the earnings announcement premium is higher, investment falls, cash levels and savings increase. Finally, the earnings announcement return is higher for firms with greater political risk, small firms, complex firms, and firms listed on NASDAQ or AMEX, inconsistent with time-separable expected utility.

Keywords: Ambiguity Aversion, Earnings Announcements, Investment

JEL Classification: D81, G14, G31

Suggested Citation

Dicks, David L. and Kim, Hwanki Brian, The Earnings Announcement Premium as Uncertainty Aversion: Theory and Evidence (September 4, 2020). Available at SSRN: https://ssrn.com/abstract=3424379 or http://dx.doi.org/10.2139/ssrn.3424379

David L. Dicks (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

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