Naïve Earnings Growth Extrapolation

62 Pages Posted: 4 Aug 2021 Last revised: 23 Oct 2022

See all articles by Chenyu Cui

Chenyu Cui

University of International Business and Economics (UIBE) - Business School

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business

Xinyi Zhang

Sun Yat-sen University (SYSU) - Business School

Date Written: August 2, 2021

Abstract

Using the unique financial reporting format in China, where quarterly earnings are reported on a year-to-date basis, we test behavioral finance models featuring fundamental extrapolation. We show that stocks with the strongest past year-to-date earnings growth experience a significant price run-up during the five trading days before their earnings announcements and a significant return reversal afterward. The effects are more pronounced for stocks with a larger retail clientele and less analyst coverage. Corroborating evidence from retail investor net buying demand suggests that investors naïvely extrapolate the salient but less informative year-to-date earnings growth when forecasting the upcoming earnings.

Keywords: Extrapolation, Earnings Announcements, Speculative Trading, Financial Reporting

JEL Classification: G14, G40, G41

Suggested Citation

Cui, Chenyu and Li, Frank Weikai and Zhang, Xinyi, Naïve Earnings Growth Extrapolation (August 2, 2021). Available at SSRN: https://ssrn.com/abstract=3897761 or http://dx.doi.org/10.2139/ssrn.3897761

Chenyu Cui

University of International Business and Economics (UIBE) - Business School ( email )

Beijing
China

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Xinyi Zhang (Contact Author)

Sun Yat-sen University (SYSU) - Business School ( email )

135 Xingang West Road
Sun Yat-Sen University
Guangzhou, Guangdong 510275
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
235
Abstract Views
1,130
Rank
197,175
PlumX Metrics