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The Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premium. Jeff Callen, Gils DeFYanco, David Denis, Marco Giaco-letti, Matt. Glcndening, Oleg Gredil, Bob llolthaiLsen, Candace Jens, NLshad Kapadia, David Lcsmond, Scott Liao. Hai Ln, Shuqing Lu, Xiumin Martin, Stanimir Markov. Partha Moluuinun, Robert Prilmeier, Gordon Richardson. Pavel Savor, Sheri Tice. The_Disappearing_Earnings_Announcement_PremiumAllan Timmermann, Santiago Truifa, Dushyant Vyas, William Waller, Toni Whited, Franco Wong, Haiwen Zhang, Huai Zhang, and participants at the ChineseThe_Disappearing_Earnings_Announcement_Premium
Accounting Professors' Association of North America (CAPANA) conference, American Accounting Association annual meeting, Wellington Finance Summit, UnThe Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premium University Goldring? Woldcnberg Complex 7 McAlister Dr. Now Orleans, LA SOI 18-5645 phone: (501) 314-7575 e-mail: aheitz (at) tulane.eduJ Department of Accounting, A.B. FYeeman School of Business Tulane University Goldring/Woldenberg Complex 7 McAlister Dr. New Orleans, LA 80118-5645 phone; (504) 3 The_Disappearing_Earnings_Announcement_Premium14-7150 e-mail: gnarayan (at) tu-lane.edu^Department of Finance, A.B. Freeman School of Business Tulane University Goldring? Woldcnberg Complex 7 McAlThe_Disappearing_Earnings_Announcement_Premium
ister Dr. New Orleans, LA 80118-5645 phone: (501) 314-2153 e-mail: mzekhnin (at) tulane.edu1The Disappearing Earnings Announcement PremiumAbstractThe The Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premiumic research for over 50 years. We provide the first evidence that this premium has disappeared from the US markets in recent years. Since it appears to have remained robust internationally, the disappearance can likely be attributed to a US-specific cause. We theorize that the 2001 Disclosure Regula The_Disappearing_Earnings_Announcement_Premiumtion has played a role in the disappearance. The regulation has led to increasingly frequent and more comprehensive filings of material information (FThe_Disappearing_Earnings_Announcement_Premium
orm 8-K). Consistent with 8-K filings preempting the information surrounding the earnings release, the premium appears to have shifted from earnings aThe Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premiumcal evidence is consistent with uncertainty-based explanations, rather than behavioral limited-attention theories. With uncertainty driving the premium, firms that file 8-Ks resolve the uncertainty pertaining to material events before t he earnings announcement and should not exhibit a premium. The The_Disappearing_Earnings_Announcement_Premiumregulation forces all firms with material information to file a Form 8-K, thereby resolving the uncertainty for both filers and nonfilers. Our evidencThe_Disappearing_Earnings_Announcement_Premium
e shows that, before the regulation, the earnings announcement premium can be attributed to only those firms that did not. file Form 8-K.Keywords: EarThe Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premiumhion over firms' earnings announcement windows. Unconditional on the information contained within the announcements, stocks earn higher returns on earnings announcement days, as compared to non announcement days. This premium, referred to as the earnings announcement premium (EAR), is among the earl The_Disappearing_Earnings_Announcement_Premiumiest documented stock market anomalies. First identified by Beaver (1968), it has subsequently been reported by Chari el al. (1988), Ball and KothariThe_Disappearing_Earnings_Announcement_Premium
(1991), Frazzini and Lamont (2007). anti Savor and Wilson (2016), among others. A monthly trading strategy exploiting this premium has earned excess rThe Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premium Despite the fact that, several recent studies have questioned the robustness of ot her anomalies (Harvey Ct. al., 2016; Limiainmaa and Roberts, 2018; McLean and Pontiff, 2016; Hou et al., 2017; Green et al., 2017), the EAP has been shown to remain robust (Hou et. al., 2017).We present the first evi The_Disappearing_Earnings_Announcement_Premiumdence that this long enduring anomaly has disappeared from the US market s in recent, years. Compared to an average weekly port folio excess ret urn oThe_Disappearing_Earnings_Announcement_Premium
f 32.6 bps (33.2 bps FF adjusted) over a 10-year period prior to 2001. the earnings announcement portfolio’s weekly return is 23.9 bps (22.9 bps FF adThe Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premiumouncement returns are 36 basis points (27 bps FF-adjiistcd) lower after 2001.In this study, we identify the enhanced real time disclosures of the 2004 DLsclosiue Regu lation as a possible cause for the disappearance of the EAR 111 response to the accounting scandals in the early 2000s, as part of th The_Disappearing_Earnings_Announcement_Premiume Sarbanes Oxley Act, Congress enacted new rules legislating increased use of real time disclosures by corporations. The SEC implemented these legislaThe_Disappearing_Earnings_Announcement_Premium
tive changes effective August 23. 2004 as additional reporting requirements for 8 K filings (Lerman and Livnat, 2010).1 Following this implementation,The Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premiumally. More importantly, the Disclosure Regulation mandated the filing of 8-Ks in a timely fashion (within four days) following the occurrence of material events (Noh et al.. 2018).We first show that 8-K filings are accompanied by an additional 32 b|>s excess return, suggesting that they indeed conta The_Disappearing_Earnings_Announcement_Premiumin material information about the firm. Second, the volatility of returns around 8-K filing dates has increased significantly relative to the pre-2004The_Disappearing_Earnings_Announcement_Premium
period. These changes in 8-K return patterns indirectly suggest that 8-Ks contain information that could have historically been conveyed by earnings The Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premiumoreover, the 8-K filings occur on random dates that are staggered across companies. When we analyze “pseudo preemption,” dates one or two weeks prior to the actual 8-K release dates, we find no evidence of preemption.We t hou consider several potential alternatives for the disappearance of the premi The_Disappearing_Earnings_Announcement_Premiumum related to learning and market structure. The learning hypothesis posits (hat investors learn about anomalies following academic publication and thThe_Disappearing_Earnings_Announcement_Premium
e consequent increased arbitrage leads to the disappearance of the anomaly (McLean and Pontiff, 2016). With respect to the EAP. the extended elapsed tThe Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premiums.The market structure arguments rely on the marked changes in trading behavior over the past two decades. In the early 2000s. high-frequency trading (HFT) accounted for fewer than 10% of equity orders, but (his proportion soon increased rapidly worldwide. According to data from the NYSE, trading vo The_Disappearing_Earnings_Announcement_Premiumlume due to HFT grow by about 164% between 2005 and 2009? The HFT trend is not just restricted lo US markets. In 2010, HFT had grown to make up 56% ofThe_Disappearing_Earnings_Announcement_Premium
equity t rades in t he US and 38% in EuroịM?.3 * 2termination of material contracts, bankruptcies, senior officer and dfrector appointments and deparThe Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premium Speed Pays, in Milliseconds." New York Times. Retrieved May 1, 2020.•’Grant, Justin (Sep 2, 2010). “High-frequency trading: Up against a Iwmdsaw." Financial Times. Retrieved May 1, 2020.2https://khothuvien.cori!International markets, thus, oiler a setting to examine whether worldwide trends in inve The_Disappearing_Earnings_Announcement_Premiumstor trading Irehavior can explain the disappearance of the earnings announcement premium. Barber el al. (2013) document EAl’s in nine non-US countrieThe_Disappearing_Earnings_Announcement_Premium
s. We examine the robustness of t he EAP and confirm its continued presence post 2001 in all nine markets. For example, after 2004 in the UK, the markThe Disappearing Earnings Announcement PremiumAmanda Rae Huitz? Gans Narayanamoorthy i Morad Zekhnini s44006*We thank Anne Beatty, Neil Bhattacharaya. The_Disappearing_Earnings_Announcement_Premiumogies or investor behavior, such as t he rise of HFT, are unlikely to explain t his disappearance in US market s.The international evidence appears to rule out worldwide trends in investor behavior and trading frictions. However, US-specific changes to trading frictions like Decimalization and Regul The_Disappearing_Earnings_Announcement_Premiumation National Market System (Reg NMS) have also been hypothesized to contribute to the disappearance of anomalies in general (Chordia et al., 2014).The_Disappearing_Earnings_Announcement_Premium
Considering a shorter time period when the SEC rolled Decimalization in a staggered fashion, we find no differences in EAP between firms subject to deGọi ngay
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