42 Pages Posted: 10 Jan 2005 Last revised: 24 Feb 2009
Date Written: February 1, 2003
We study the stock market reaction to aggregate earnings news. Previous research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. We find that the relation between returns and earnings is substantially different in aggregate data. First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns are negatively correlated with concurrent earnings; over the last 30 years, stock prices increased 6.5% in quarters with negative earnings growth and only 1.9% otherwise. This finding suggests that earnings and discount rates move together over time, and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns.
JEL Classification: G12, G14, M41
Suggested Citation: Suggested Citation
Lewellen, Jonathan and Kothari, S.P. and Warner, Jerold B., Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance (February 1, 2003). MIT Sloan Working Paper No. 4284-03. Available at SSRN: https://ssrn.com/abstract=380127 or http://dx.doi.org/10.2139/ssrn.380127
By Eugene Fama
By Andrew Lo