Immediate and Subsequent Market Responses to Earnings Announcements

China Accounting and Finance Review, 2020

33 Pages Posted: 15 Jul 2020

See all articles by Zhipeng Yan

Zhipeng Yan

New Jersey Institute of Technology

Yan Zhao

City College - City University of New York

Ming Fang

Martin Tuchman School of Management, New Jersey Institute of Technology

Date Written: June 22, 2020

Abstract

This paper studies the relation between immediate market response to corporate earnings announcements and subsequent stock price movement. By adapting an information signal model from Holthausen and Verrecchia (1988), we develop a new measure — the immediate earnings response coefficient (IERC) — to capture immediate market response. We find that a smaller immediate market reaction to earnings surprise, or a lower IERC, leads to a larger subsequent market response. A trading strategy based on our findings can generate an average abnormal return of 5.21% per quarter.

Keywords: Immediate Earnings Response Coefficient, Post-Earnings-Announcement Drifts

JEL Classification: G14, G11

Suggested Citation

Yan, Zhipeng and Zhao, Yan and Fang, Ming, Immediate and Subsequent Market Responses to Earnings Announcements (June 22, 2020). China Accounting and Finance Review, 2020, Available at SSRN: https://ssrn.com/abstract=3633394 or http://dx.doi.org/10.2139/ssrn.3633394

Zhipeng Yan

New Jersey Institute of Technology ( email )

United States

Yan Zhao

City College - City University of New York ( email )

Convert Avenue at 138th Street
New York, NY 10031
United States

Ming Fang (Contact Author)

Martin Tuchman School of Management, New Jersey Institute of Technology ( email )

United States

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