Limits to arbitrage, market sentiment, and the return patterns after earnings announcements
Publication Type
Journal Article
Publication Date
1-2025
Abstract
We find that stock-level valuation uncertainty (measured by idiosyncratic risk) and prevailing market-wide sentiment significantly affect the post earnings announcement return drift. When earnings surprise conflicts with prevailing market sentiment, stocks with higher valuation uncertainty demonstrate a greater return drift. In contrast, when earnings surprise is in line with market sentiment, the same highly uncertain stocks do not exhibit the anomalous post-earnings announcement drifts. These results are robust after controlling well-documented factors contributing to variations in the magnitude of return patterns. Our findings suggest that investors of highly uncertain stocks underreact to earnings news that conflicts with prevailing market sentiment.
Keywords
valuation uncertainty, market sentiment, PEAD
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
Publication
Journal of Behavioral Finance
ISSN
1542-7560
Identifier
10.1080/15427560.2024.2444290
Publisher
Taylor and Francis Group
Citation
GOH, Choo Yong, Jeremy and YANG, Zongfei (Lisa).
Limits to arbitrage, market sentiment, and the return patterns after earnings announcements. (2025). Journal of Behavioral Finance.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7824
Additional URL
https://doi.org/10.1080/15427560.2024.2444290