Event Study

Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance S.P. Kothari Sloan teach of Management, MIT kothari@mit.edu Jonathan Lewellen Sloan School of Management, MIT and NBER lewellen@mit.edu Jerold B. Warner Simon Graduate School of Business Administration, University of Rochester warner@simon.rochester.edu Revised: February 2003 First conscription: September 2002 We are grateful to Jun Pan, Bill Schwert, Ross Watts, and workshop participants at Arizona State, MIT, Rochester, and the 2003 APJAE Symposium for helpful comments. We also thank Irfan Safdar for excellent look assistance. Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance Abstract We study the dribble trade reaction to inwardness mesh intelligence. Previous interrogation shows that, for individual incorruptibles, downslope prices react positively to meshwork untesteds precisely require several quarters to adequatey chew everyplace the teaching in earnings. We find that the relation between returns and earnings is substantially different in heap up data. First, returns are orthogonal to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns are negatively correlated with concurrent earnings; over the last 30 years, stock prices increased 6.

5% in quarters with negative earnings growth and only 1.9% 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. 1. Introduction This paper studies the relation between stock returns and aggregate earnings surprises. An extensive literature investigates the stock market reaction to individual companies earnings announcements (e.g., Ball and Brown, 1968; Watts, 1978; Bernard and Thomas, 1989). At the firm level, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. Our goal is to... If you want to get a full essay, order it on our website: Ordercustompaper.com

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