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

Abstract

This study finds that firm life stage affects investor behavior around earnings announcements. Introduction and decline stage companies exhibit significantly less positive cumulative abnormal returns (CARs) around positive earnings surprises and more negative CARs around negative earnings surprises as compared with companies in growth, maturity, and shake-out stages. As stocks become more lottery-like, 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 the variation in stock price responses is driven by speculation from noise/retail traders in hard-to-value stocks.

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

JEL Classification: G10, G12, G14