Driven to Distraction: Extraneous Events and Underreaction to Earnings News

3rd Prize, 2007 Chicago Quantitative Alliance Annual Academic Competition

Journal of Finance, Forthcoming

41 Pages Posted: 18 Apr 2007 Last revised: 21 Jun 2018

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Sonya S. Lim

DePaul University - Department of Finance

Siew Hong Teoh

University of California, Irvine - Accounting Area

Date Written: April 16, 2007

Abstract

Psychological evidence indicates that it is hard to process multiple stimuli and perform multiple tasks at the same time. This paper tests the investor distraction hypothesis, which holds that the arrival of extraneous news causes trading and market prices to react sluggishly to relevant news about a firm. Our test focuses on the competition for investor attention between a firm's earnings announcements and the earnings announcements of other firms. We find that the immediate stock price and volume reaction to a firm's earnings surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day. Distracting news has a stronger effect on firms that receive positive than negative earnings surprises. Industry-unrelated news has a stronger distracting effect than related news. A trading strategy that exploits post-earnings announcement drift is unprofitable for announcements made on days with little competing news.

Presentation Slides: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3195322

Keywords: limited attention, behavioral finance, investor psychology, capital markets, post-earnings announcement drift, market efficiency

JEL Classification: G12, G14, M41, M45

Suggested Citation

Hirshleifer, David A. and Lim, Sonya S. and Teoh, Siew Hong, Driven to Distraction: Extraneous Events and Underreaction to Earnings News (April 16, 2007). 3rd Prize, 2007 Chicago Quantitative Alliance Annual Academic Competition; Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=980958 or http://dx.doi.org/10.2139/ssrn.980958

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sonya S. Lim (Contact Author)

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://sites.google.com/site/sonyalim/

Siew Hong Teoh

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

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