Investor and Analyst Reactions to Earnings Announcements of Related Firms: An Empirical Analysis

In this article I examine the response of investors and analysts of nonannouncing firms to the earnings report of the first announcers in the industry. The error in the earnings forecast of the first announcer is found to be informative about the errors in the contemporaneous earnings forecasts of subsequent announcers in the industry. However, investors and analysts do not appear to fully incorporate the information from the first announcers' news in their revised earnings expectations for subsequent announcers. This apparent underreaction to the first announcers' news leads to predictable stock returns for subsequent announcers in the days following the first announcement. Results of this study can be seen as further evidence of investor and analyst underreaction to publicly available information.     

14-Week quarters

Many firms define their fiscal quarters as 13-week periods so that each fiscal year contains 52 weeks, which leaves out one or two day(s) a year. To compensate, one extra week is added every fifth or sixth year and, consequently, one quarter therein comprises 14 weeks. We find evidence of predictable forecast errors and stock returns in 14-week quarters, suggesting that analysts and investors do not, on average, adjust their expectations for the extra week. The ease with which 14-week quarters can be predicted, and expectations adjusted, suggests a surprising lack of effort on the part of analysts and investors.     

Underreaction to Self-Selected News Events: The Case of Stock Splits

An emerging literature looking at self-selected, corporate newsevents concludes that markets appear to underreact to news.Recent theoretical articles have explored why or how underreactionmight occur. However, the notion of underreaction is contentious.We revisit this issue by focusing on one of the most simpleof corporate transactions, the stock split. Prior studies thatreport abnormal return drifts subsequent to splits do not appearto be spurious, nor a consequence of misspecified benchmarks.Using recent cases, we report a drift of 9% in the year followinga split announcement. We consider fundamental operating performanceas a source of the underreaction and find that splitting firmshave an unusually low propensity to experience a contractionin future earnings. Further, analysts' earnings forecasts arecomparatively low at the time of the split announcement andrevise sluggishly over time. Together these results are consistentwith the notion of market underreaction to the information incorporate news events.