Information Intensity and Pricing of Earnings Announcement Risk

Abstract

Earnings announcement (EA) poses non-diversifiable risk to investors. This study examines whether investors demand higher returns for stocks with high EA risk. We find evidence that EA risk is priced, however, the premium is realized only during periods with intensified cash-flow news. Specifically, we construct an ex ante measure of expected information intensity (EII) and find that in the subsample of high-EII firms, those with high EA risk have significantly higher future returns. Controlling for known risk factors, stocks with high EA risk outperform those with low EA risk by 0.58% in monthly Fama-French five-factor alpha. We also confirm the well-documented announcement premium, i.e., high-EII firms outperform low-EII firms, and show that EA risk premium is distinct from the announcement premium. To exploit both premiums, a feasible strategy of long stocks with both high-EII and high EA risk and short stocks with low-EII yields monthly 0.83% (annualized 9.96%) five-factor alpha.

Keywords: Earnings announcement risk; Risk premium; Information intensity; Cash-flow news; Announcement premium

JEL Classification: G12; G14