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

65 Pages Posted: 8 Sep 2020 Last revised: 22 Dec 2020

See all articles by Kelley Bergsma

Kelley Bergsma

Ohio University

Andy Fodor

Ohio University

Vijay Singal

Virginia Tech

Jitendra Tayal

Ohio University

Date Written: December 21, 2020

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

Suggested Citation

Bergsma, Kelley and Fodor, Andy and Singal, Vijay and Tayal, Jitendra, Does Investor Behavior Vary by Firm Life Stage? Evidence from Earnings Announcement Reactions (December 21, 2020). Available at SSRN: https://ssrn.com/abstract=3661714 or http://dx.doi.org/10.2139/ssrn.3661714

Kelley Bergsma

Ohio University ( email )

1 Ohio University
Athens, OH OH 45701
United States

Andy Fodor

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

Vijay Singal

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States
5402317750 (Phone)

Jitendra Tayal (Contact Author)

Ohio University ( email )

Athens, OH 45701
United States

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