Firm-specific Information Processing and the Delayed Discovery of Macroeconomic News: Evidence from Earnings Announcement Returns

Abstract

Analyzing a panel of earnings announcers from 1998-2022, we document that the aggregate market return on quarterly earnings announcement dates is positively associated with the announcing firm’s 3-day abnormal returns following the announcement. This effect is strongest for firms with extreme earnings surprises and fades by day 7, indicating a short-lived delay in incorporating the aggregate return from the announcement date. Additional analyses confirm these patterns of return predictability for a set of well-identified macroeconomic news dates. Our findings are more pronounced when investors exert more effort in acquiring announcing firm information, as measured by SEC EDGAR filing downloads, when macro-news has a larger impact on a firm’s stock returns, for smaller firms with higher costs of information processing, and when marginal investors are more constrained in attention and processing capacity, as proxied by retail trading activities. Overall, findings support the notion that investors have finite information processing capacity and that intensive efforts to acquire firm-specific earnings news impede the timely incorporation of macroeconomic news into prices.

Keywords: Earnings Announcements, Information Processing, Investor Neglect, Limited Attention, Market Efficiency, Asset Pricing

JEL Classification: G02, G12, G40, M41