Stock returns,aggregate earnings surprises,and behavioral finance |
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| Authors: | S.P. Kothari Jonathan Lewellen Jerold B. Warner |
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| Affiliation: | 1. Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02142, USA;2. Tuck School of Business, Dartmouth College, Hanover, NH 03755, USA;3. National Bureau of Economic Research, Cambridge, MA 02138, USA;4. William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY 14627, USA |
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| Abstract: | We study the stock market's reaction to aggregate earnings news. Prior research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. We find a substantially different pattern in aggregate data. First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns correlate negatively with concurrent earnings; over the last 30 years, for example, stock prices increased 5.7% in quarters with negative earnings growth and only 2.1% otherwise. This finding suggests that earnings and discount rates move together over time and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns. |
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| Keywords: | E31 E32 G12 G14 M41 |
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