Does Investor Behavior Vary by Firm Life Stage? Evidence from Earnings Announcement Reactions

Abstract

Prior literature documents that corporate decisions are influenced by firm life stage, yet the relationship between investor behavior and firm life stage is not well understood. Using a cash flow-based life stage classification, this study finds that investor reactions to earnings announcements differ by firm life stage. Introduction and decline stage companies exhibit three-day cumulative abnormal returns (CARs) around positive earnings surprises that are at least 123 bps lower than firms in growth, maturity, and shake-out stages. These companies also exhibit reactions to negative earnings surprises that are at least 55 bps lower than firms in other life stages. Moreover, the inverted V-shaped pattern in lottery return spreads around earnings announcements documented in Liu, Wang, Yu, and Zhao (2020) is strongest for introduction and decline stage firms and weaker for firms in other life stages. Comparing lottery stocks to non-lottery-like stocks, immediate reactions to positive earnings surprises are less positive for introduction and decline stage firms but are more positive for firms in other life stages. Our findings suggest that noise/retail traders are attracted to speculation in hard-to-value introduction and decline stage stocks, where overoptimistic speculation is met with disappointment when value-relevant earnings news is released.

Keywords: Earnings announcements, firm life stage, idiosyncratic volatility, lottery, speculation.

JEL Classification: G10, G12, G14