Short sale constraints,heterogeneous interpretations,and asymmetric price reactions to earnings announcements |
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| Authors: | Eric C Chang Jianguo Xu Liu Zheng |
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| Institution: | 1. University of Hong Kong, Faculty of Business and Economics, Pokfulam Road, Hong Kong;2. Beijing University, National School of Development/CCER, Beijing, China;3. City University of Hong Kong, Department of Accountancy, Tat Chee Avenue, Hong Kong;1. John Cook School of Business, Saint Louis University, United States;2. Mays Business School, Texas A&M University, United States;3. School of Business, American University in Cairo, Egypt;1. Ecole Nationale Supérieure de Chimie de Rennes, CNRS, UMR 6226, 11 Allée de Beaulieu, CS 50837, 35708 Rennes Cedex 7, France;2. Institut de Physique de Rennes, Université Rennes 1, UMR-CNRS 6251, Campus Beaulieu Bat. 11A, 35042 Rennes Cedex, France;3. Université européenne de Bretagne, France;1. Young Researchers Club, Islamic Azad University, Science and Research Branch, Tehran 1477893855, Iran;2. Tehran Naftoon Arya Eng. Co., Jahanmehr St., Fatemi Sq., Tehran 1581768516, Iran;3. Department of Chemical Engineering, University of Tehran, Tehran 1136514563, Iran;1. University at Albany, SUNY, Albany, NY 12222, United States;2. Institute of Management Accountants, Montvale, NJ 07645, United States;3. Skidmore College, Saratoga Springs, NY 12866, United States;1. Colorado State University, United States;2. Fordham University, United States;3. University of Connecticut, United States;1. School of Physics, University of Electronic Science and Technology of China, Cheng Du 610054, PR China;2. School of Management and Economics, University of Electronic Science and Technology of China, Cheng Du 610054, PR China;3. Web Sciences Center & Big Data Research Center, University of Electronic Science and Technology of China, Cheng Du 610054, PR China;4. Center for Polymer Studies and Department of Physics, Boston University, Boston, MA 02215, USA;5. School of information and communication engineer, University of Electronic Science and Technology of China, Cheng Du 610054, PR China |
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| Abstract: | This study tests Miller’s (1977) overpricing hypothesis from a new angle. Specifically, we investigate the effects of heterogeneous interpretations on price reactions to earnings announcements. We find that the difference between good news and bad news earnings response coefficients increases with the degree of heterogeneous interpretations in the presence of short sale constraints. This pattern is more pronounced when short sale constraints are more binding. These findings support the notion that, under short sale constraints, stock prices selectively incorporate more optimistic opinions rather than the average opinion of all investors. Therefore, reducing short sale constraints should facilitate price discovery and improve price efficiency. This study complements recent studies examining the joint effect of short sale constraints and ex ante opinion divergence on price reactions to earnings announcements. |
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