Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance

42 Pages Posted: 10 Jan 2005 Last revised: 24 Feb 2009

Jonathan Lewellen

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jerold B. Warner

University of Rochester – Simon Business School

Date Written: February 1, 2003

Abstract

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

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

Jonathan W. Lewellen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-8650 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

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