Famous Firms, Earnings Clusters, and the Stock Market

57 Pages Posted: 26 Oct 2020 Last revised: 23 Nov 2020

See all articles by Yixin Chen

Yixin Chen

University of Rochester - Simon Business School

Randolph B. Cohen

Harvard University - Business School (HBS)

Zixuan (Kevin) Wang

Harvard Business School

Date Written: September 5, 2020

Abstract

We show that much of the market premium for the year occurs on a handful of days, identifiable well in advance, on which several of the market's most famous, high-media-attention firms simultaneously announce earnings after the market close. Puzzlingly, the market surges occur during the 24 hours prior to the earnings announcements, from close to close. Since there is no overlap between the price increase period and the information revelation, the high returns do not appear to represent a risk premium, and our tests seem to rule out information-leakage explanations. Deepening the puzzle, the market delivers high returns only prior to post-close earnings-announcement clusters, not in advance of clusters that occur in the pre-open period. In addition to being economically large and easily tradeable, the effect is statistically significant, and the results hold consistently throughout our sample. We argue that the best explanation for our findings is that of Miller (1977) as extended by Hong and Stein (2007): when over a short “attention” period difference of opinion combines with short-sale constraints, prices will rise as optimists buy while pessimists cannot sell.

Keywords: Macro Announcement, Earnings Announcement, Pre-announcement Drift, Disagreement

JEL Classification: G12, G14

Suggested Citation

Chen, Yixin and Cohen, Randolph B. and Wang, Zixuan (Kevin), Famous Firms, Earnings Clusters, and the Stock Market (September 5, 2020). Available at SSRN: https://ssrn.com/abstract=3685452 or http://dx.doi.org/10.2139/ssrn.3685452

Yixin Chen (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Randolph B. Cohen

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Zixuan (Kevin) Wang

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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