Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance

By S. Kothari, J. Lewellen, Jerold B. Warner. 2006

442 citations recorded by the source corpus.

We study the stock market reaction to aggregate earnings news. Previous research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. We find that the relation between returns and earnings is substantially different in aggregate data. First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns are negatively correlated with concurrent earnings; over the last 30 years, stock prices increased 6.5% in quarters with negative earnings growth and only 1.9% otherwise. This finding suggests that earnings and discount rates move together over time, and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/0bbd5349cc0cf0ee9feb0c5cb16bcaf777daa1a3

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Citations in the corpus

Earnings Announcements and Systematic Risk (2015, unknown): “These results are comparable to those in previous work (e.g., Kothari, Lewellen, and Warner (2006)).”
Accruals, cash flows, and aggregate stock returns (2009, methodology): “Kothari, Lewellen, and Warner (2006), or KLW, test whether the PEAD effect (Bernard and Thomas, 1990), in which ﬁrm-level earnings surprises are on average followed by a continuation of stock returns over the next nine months, extends to the aggregate level.”
Predictability and the Earnings-Returns Relation (2009, methodology): “They nd that cash- ow news are positively associated with stock returns, which is consistent with rm-level ndings and is inconsistent with the conclusion of Kothari, Lewellen, and Warner (2006) that earnings surprises are negatively associated with contemporaneous stock returns.”
Does the Scope of the Sell-Side Analyst Industry Matter? An Examination of Bias, Accuracy, and Information Content of Analyst Reports: Does the Scope of the Sell-Side Analyst Industry Matter? (2017, unknown): “…(such as poor post-equity issuance returns) are observed at aggregate levels (e.g.,Baker and Wurgler (2006)), others (such as post earnings announcement drift and the accruals anomaly) weaken or even reverse direction (e.g., Kothari, Lewellen, and Warner (2006); Hirshleifer, Hou, and Teoh (2009)).”
The Predictive Content of Aggregate Analyst Recommendations (2009, unknown): “Seyhun [1988, 1992] and Lakonishok and Lee [2001] show that aggregate insider trading predicts future market movements.”
Short Interest and Aggregate Stock Returns (2016, result): “For example, in contrast to the positive relation documented at the firm level, Kothari, Lewellen, and Warner (2006) find a negative relation between aggregate earnings surprises and returns.”
Technological Innovations and Aggregate Risk Premiums (2009, background): “Kothari, Lewellen, and Warner (2006) find a negative relation between aggregate earnings surprises and subsequent market returns. for technological innovations—patent shocks and R&D shocks—in Section 2.”
Do investors exhibit behavioral biases in investment decision making? A systematic review (2018, unknown): “Kothari et al. (2006) contradict behavioral finance theories that the post earnings announcement drift of companies is not capable of explaining the aggregate price returns.”