Immediate and Subsequent Market Responses to Earnings Announcements
China Accounting and Finance Review, 2020
33 Pages Posted: 15 Jul 2020
Date Written: June 22, 2020
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: Suggested Citation