Asset Pricing around Earnings Announcement Days
57 Pages Posted: 18 Feb 2020 Last revised: 28 Sep 2020
Date Written: February 11, 2020
The relation between average equity return and market exposure behaves distinctively on days on which early earnings announcements are made by firms for which the announcements have a large spillover “influence” on discount rates and expectations of earnings for related firms. On such days (labelled as LEADs), a higher beta of one in the cross-section is significantly associated with an increase in average equity excess returns of 22.70 basis points. When announcement days are partitioned into overnight and intraday, we show that the positive beta-return relation holds for overnight LEAD announcements and hourly during trading after the market opens. On non-LEADs, returns are flat with respect to beta. We also show that there is a cycle in earnings announcement premiums for LEAD announcers, and that this cycle coincides with beta increases. The post-earnings announcement drifts (PEADs) drop substantially a month after LEAD earnings beats, which is consistent with a fall in future discount rates when unexpectedly high earnings are announced. But there is no other discernible PEAD for LEADs or earlier-than-LEADs announcements.
Keywords: Capital asset pricing model; Earnings announcements; Cross-section of returns; Security market line.
JEL Classification: G10; G12; G14
Suggested Citation: Suggested Citation