Pay Attention to Friday Earnings Announcements!
Investor Inattention and Friday Earnings Announcements
- Steffano Dellavigna and Joshua M. Pollet
- A version of the paper can be found here.
- A formal write-up can be found at Empiritrage.com
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Does limited attention among investors affect stock returns? We compare the response to earnings announcements on Friday, when investor inattention is more likely, to the response on other weekdays. If inattention influences stock prices, we should observe less immediate response and more drift for Friday announcements. Indeed, Friday announcements have a 15% lower immediate response and a 70% higher delayed response. A portfolio investing in differential Friday drift earns substantial abnormal returns. In addition, trading volume is 8% lower around Friday announcements. These findings support explanations of post-earnings announcement drift based on underreaction to information caused by limited attention.
IBES, CRSP, and COMPUSTAT from 1984 to 2006.
- Paper compares the reaction to earnings announcements of firms reporting on Fridays to those reporting on all other days of the week. The time period of the study is January 1984 – June 2006.
- The consensus forecast is the median earnings forecast over the last 30 days before the announcement date.
- The earnings surprise is calculated as the difference between the earnings announcement and the consensus earnings forecast, normalized by the price of a share.
- Paper finds that Friday earnings surprises have a lower initial response, a larger post-announcement drift, and lower trading volume compared to non-Friday earnings announcements.
- Last, paper gives a monthly long/short strategy that generates a monthly alpha of 4.62%.
- Go long all firms in the top 20% Friday positive earnings surprises for the past month and go short all firms in the bottom 20% non-Friday negative earnings surprises for the past month.
- Form this equal-weighted portfolio on the 1st of the month, and hold for 1 month. Rebalance monthly.
- While the alpha estimates are very high for the long/short portfolio, there is no size cutoff for firms, so some of these results may be driven by small firms.
- Additionally, some of the short positions required in the long/short portfolio may have high costs of borrowing.
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Definitions of common statistics used in our analysis are available here (towards the bottom)