The Relation Between Investor Uncertainty and Market Reactions to Earnings Announcements: Evidence from the Property‐Casualty Insurance Industry in the USA

Abstract:   This paper investigates the relationship between investor uncertainty, gauged by properties of analysts' forecasts, and the stock market response to earnings. We find that uncertainty is best characterized by a comprehensive measure recently proposed by Barron, Kim, Lim and Stevens (1998) , BKLS. The BKLS measure is related to uncertainty‐inducing events, as well as factors that affect the difficulty faced by analysts in forecasting earnings. We conclude that, first, pre‐disclosure uncertainty is a significant determinant of the price reaction to the earnings release, and second, BKLS is a more comprehensive measure of uncertainty than simple dispersion.     

THE INTRADAY INTERDEPENDENCE STRUCTURE BETWEEN U.S. AND JAPANESE EQUITY MARKETS

Contrary to the efficient market hypothesis, previous research documents a significant correlation between lagged U.S. close-to-close stock market returns and current open-to-close Japanese equity market returns. We find that the significant correlation is limited to the first hour of Japanese trading, with subsequent hourly returns independent of lagged U.S. returns. This evidence suggests that the documented significant correlation is attributable to a sticky Japanese opening value associated with the use of nonsynchronous index data.     

The information content of the exchange rate and the stability of real output under alternative exchange-rate regimes

When the exchange rate is flexible, and thus responds to market forces, it provides agents with useful information, while when it is fixed (by a feedback rule) it does not. The implications of this asymmetry for the stability of real output under the two regimes is discussed. It is shown that whenever shocks are predominantly of one variety, or when domestic monetary shocks accompanied by one real shock, a flexible exchange rate does a better job of stabilizing real output than does a fixed exchange rate. These results undermine arguments favoring fixed exchange rates because they ‘discipline’ monetary policy. In addition, it is demonstrated that managed floating rules and exchange rate feedback rules are irrelevant for the distribution of real output.     

ABNORMAL RETURNS AND ANALYSTS' EARNINGS FORECAST REVISIONS ASSOCIATED WITH THE PUBLICATION OF “STOCK HIGHLIGHTS” BY VALUE LINE INVESTMENT SURVEY

We examine the reaction of stocks and the response of financial analysts' earnings forecasts to securities recommended as “Stock Highlights” by Value Line Investment Survey. Significant abnormal returns appear around the publication of stock highlights. Stock price responses are relatively efficient and permanent. Using earnings expectation data provided by the Institutional Brokers Estimate System, we find analysts raise their forecasts significantly following Value Line recommendations. Near-term forecast revisions are significantly related to stock returns at the time of the recommendations. Thus, an explanation for Value Line's security recommendation success is its ability to generate firm-specific earnings information.     

Price,output, and exchange rate movements in the open economy

Since the advent of managed floating it has come to be accepted as a stylized fact that short-run deviations from purchasing power parity are both substantial and persistent. Two explanations of these deviations have been advanced in the literature. One emphasizes the role of changes in non-traded goods prices while the other views deviations from purchasing power parity as being due to sticky goods prices and slow adjustment of goods markets. This paper presents yet a third possible explanation of deviations from purchasing power parity — they may be necessary in order to facilitate the relative price changes that are required to maintain equilibrium in the face of unanticipated shocks. In addition, the issue of exchange rate overshooting is addressed. Whereas the sticky price models view exchange rate overshooting and exchange rate volatility as symptoms of some fundamental disequilibrium, the perspective taken here is that these events are, in principle, compatible with a world in which all markets clear continuously.