Asymmetric impact of earnings news on investor uncertainty

Abstract

We describe a model that predicts an asymmetric impact of disclosure on investor uncertainty. We show that good news tends to resolve more uncertainty than bad news, and that uncertainty can be revised upwards if the investors' prior belief is sufficiently strong and the signal is sufficiently bad. This result is in contrast to classical disclosure models, where new information always resolves uncertainty and the change in uncertainty depends only on the relative precision of the news. Using option‐implied volatility as a proxy for uncertainty, we find strong support for our predictions. We also show that our results are robust to competing explanations, notably to the leverage effect and volatility feedback, as well as to the jump risk induced in anticipation of the earnings announcements.

Does real earnings smoothing reduce investors’ perceived risk?

“…The literature has paid considerable attention to ex-post realized risk in the equity market, which is typically captured by stock price volatility (e.g., Campbell et al, 2014;Kravet & Muslu, 2013;Rajgopal, 1999), but it has paid limited attention to ex-ante perceived risk in the equity market as reflected in option-implied volatility. 10 Several studies examine the relations between option-implied volatility and management guidance and earnings announcements (e.g., Acker, 2002;Billings et al, 2015;Neuruer et al, 2016;Peng et al, 2020;Rogers et al, 2009). Different from these studies on the impact of disclosures on equity investors' risk assessments, the present study focuses on earnings smoothing that influences the reported outcomes and provides new evidence that real earnings smoothing reduces equity investors' perceived risk.…”

Time‐varying impacts of expectations on housing markets across hot and cold phases

“…Most important, the findings show that the responses of the GTTB to both bad and good shocks are stronger in the optimism regime than the pessimism one. Peng et al (2020) demonstrate an asymmetric impact of corporate disclosure on investor uncertainty. They argue that good news is more likely to reduce uncertainty than bad news, and that uncertainty can rise markedly when the investors' prior belief is strongly optimistic, but a sufficiently bad signal occurs.…”

Accounting information, disclosure, and expected utility: Do investors really abhor uncertainty?

“…The simplest case is where highly precise information suggests an error in previous or prior assessments leaving two contrary indications of possibly equal precision and potentially greatly increased uncertainty and indecision. Peng, Johnstone, and Christodoulou (2020) gave a formal model based on conditional normal distributions that applies the law of total variance and shows how information that renders the market unsure of which of two models (regimes) is “true” can leave the market undecided and (much) less certain about the future payoff . Information that increases payoff uncertainty can be welcomed by new investors because it leaves a lower priced market in which a new investor can invest with higher expected utility.…”