Uncertainty Resolution Before Earnings Announcements
53 Pages Posted: 2 Jun 2020 Last revised: 27 Feb 2021
Date Written: May 6, 2020
We document that 72% of the earnings announcement premium is realized before, rather than after, earnings releases. It is possible that the large pre-announcement returns are compensations for uncertainty resolution before announcement. To test the uncertainty resolution hypothesis, we examine the pattern of pre-announcement returns in the cross section of stocks. There are compelling empirical evidence in support of the hypothesis: the pre-announcement returns are significantly higher for firms with high uncertainty, and when the aggregate market uncertainty is high. Finally, we present two distinct channels for uncertainty resolution: information acquisition by investors and information supply by analysts.
Keywords: Pre-Announcement Return, Earnings Announcements, Uncertainty Resolution
JEL Classification: G12, G14
Suggested Citation: Suggested Citation