Working Paper: CEPR ID: DP8259
Authors: Ron Kaniel; Shuming Liu; Gideon Saar; Sheridan Titman
Abstract: This paper documents evidence consistent with informed trading by individual investors around earnings announcements using a unique dataset of NYSE stocks. We show that intense aggregate individual investor buying (selling) predicts large positive (negative) abnormal returns on and after earnings announcement dates. We decompose the abnormal returns into a component that is attributed to risk-averse liquidity provision and a component that is attributed to private information or skill, and show that about half of the abnormal returns in the three months following the event can be attributed to private information. We also examine the behavior of individuals after the earnings announcement and find that they trade in the opposite direction to both pre-event returns (i.e., exhibit "contrarian" behavior) and the earnings surprise (i.e., exhibit "news-contrarian" behavior). The latter behavior, which could be consistent with profit-taking, has the potential to slow down the adjustment of prices to earnings news and contribute to the post-earnings announcement drift.
Keywords: Earnings Announcement; Individual Investors
JEL Codes: G11; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Individual investors exhibit contrarian behavior after earnings announcements (G41) | trading in opposite direction to pre-event returns (G14) |
| Intense aggregate individual investor buying (G40) | large positive abnormal returns (G14) |
| Intense aggregate individual investor selling (G19) | large negative abnormal returns (G14) |
| Intense individual investor trading (G14) | abnormal returns attributed to private information (G14) |