Inconsistent signals, earnings announcements, and market uncertainty

Wen He, Andrew B. Jackson, Kevin Liang

Research output: Contribution to journalArticleResearchpeer-review

1 Citation (Scopus)

Abstract

We test the proposition in Johnstone (2016) that new information may lead to higher, rather than lower, uncertainty about firms’ future payoffs. Based on the Bayesian rule, we hypothesize earnings news that is inconsistent with investors’ prior belief will lead to higher market uncertainty. Using earnings signals in the past few quarters to proxy for investors’ prior belief, we find supporting evidence that, relative to consistent earnings news, inconsistent news results in an increase in market uncertainty measured by implied volatility. Inconsistent earnings news has a larger effect on market uncertainty when prior beliefs are stronger and when the news is negative. Overall, our evidence highlights the importance of prior belief and inconsistent signals in understanding the effect of earnings news on market uncertainty.

Original languageEnglish
Pages (from-to)411-435
Number of pages25
JournalAbacus
Volume55
Issue number2
DOIs
Publication statusPublished - Jun 2019
Externally publishedYes

Keywords

  • Accounting disclosure
  • Earnings news
  • Implied volatility
  • Information
  • Market uncertainty

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