Using Earnings Announcement Returns as Evidence of Mispricing

Download or read book Using Earnings Announcement Returns as Evidence of Mispricing written by Dennis J. Chambers and published by . This book was released on 2004 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: Numerous studies have used the proportion of anomalous returns earned during earnings announcement intervals as evidence to distinguish between risk and mispricing explanations for those returns. This approach implicitly assumes that returns expected as compensation for risk-bearing are earned evenly through time. However, previous research also suggests that expected returns may be higher at earnings announcements than at other times when the flow of firm-specific information between earnings announcements is sparse and the disclosure of earnings is expected to resolve significant uncertainty. We provide evidence that returns are more concentrated at earnings announcements for firms with low information flow than for firms with high information flow. We then demonstrate that earnings announcement returns concentrations associated with the well-known book-to-market returns anomaly are no longer evident after controlling for cross-firm variation in information flow. Overall, our results suggest that before interpreting a concentration of anomalous returns at earnings announcements as evidence of mispricing, care should be taken to insure that the concentration is not related to information flow.