Mind the Gap: The Non-Fundamental Role of Earnings Days

108 Pages Posted: 28 Nov 2021 Last revised: 20 Dec 2024

See all articles by Azi Ben-Rephael

Azi Ben-Rephael

Rutgers Business School - Rutgers University

Steffen Hitzemann

University of Houston - Department of Finance

Yuanyuan Xiao

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: November 19, 2021

Abstract

We construct a new measure—the Return-Earnings Gap (REG)—that captures the market's relative (mis)reaction to earnings surprises. About 50% of the earnings-day return associated with REG reverses subsequently, with the reversal being strikingly slow, taking about three years. REG feeds back into and distorts market participants’ belief formation, predicting subsequent analyst forecast errors, corporate actions associated with mispricing, and the divergence of anomaly returns. A simple structural model of market participants’ expectation formation corroborates these findings. Our results show that earnings-day returns contain a substantial non-fundamental component with long-term effects, contrasting with the predominant fundamental view of earnings days.

Keywords: investor beliefs, earnings announcements, misreaction, analyst expectations, mispricing, anomalies

JEL Classification: G00, G12, G14, G40, G41

Suggested Citation

Ben-Rephael, Azi and Hitzemann, Steffen and Xiao, Yuanyuan,
Mind the Gap: The Non-Fundamental Role of Earnings Days
(November 19, 2021). Available at SSRN: https://ssrn.com/abstract=3966758 or http://dx.doi.org/10.2139/ssrn.3966758

Azi Ben-Rephael (Contact Author)

Rutgers Business School - Rutgers University ( email )

HOME PAGE: http://https://sites.google.com/site/abenreph

Steffen Hitzemann

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Yuanyuan Xiao

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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