Earnings Announcements and Systematic Risk

Abstract

Firms scheduled to report earnings earn an annualized abnormal return of 9.9%. We propose a risk‐based explanation for this phenomenon, whereby investors use announcements to revise their expectations for nonannouncing firms, but can only do so imperfectly. Consequently, the covariance between firm‐specific and market cash flow news spikes around announcements, making announcers especially risky. Consistent with our hypothesis, announcer returns forecast aggregate earnings. The announcement premium is persistent across stocks, and early (late) announcers earn higher (lower) returns. Nonannouncers' response to announcements is consistent with our model, both over time and across firms. Finally, exposure to announcement risk is priced.

Anomalies and News

“…The results further show that for both high and low Net stocks, betas are not significantly higher on earnings announcement days. The coefficient on Earnings Day × Market is positive and significant, which shows that on average, across all stocks, betas are higher on earnings days, consistent with Patton and Verardo () and Savor and Wilson (), but this effect is not different for high or low Net stocks. Overall, the results in regression do not support the idea that elevated market betas can explain why anomaly returns are higher on earnings days.…”

“…However, our results could be consistent with dynamic‐risk models, which allow for time‐varying risk premia and time‐varying betas. Papers in this spirit include Patton and Verardo (), who find that a stock's beta with respect to the market portfolio is higher on earnings announcement days and explain this finding with a dynamic‐learning model, and Savor and Wilson (), who develop a dynamic risk‐based model to explain why stock returns are higher on earnings announcement days.…”

“…To the best of our knowledge, we are the first to make this connection. As we mention above, the dynamic risk frameworks of Patton and Verardo () and Savor and Wilson () can explain why stock returns are higher on earnings announcement days, but these papers do not attempt to explain stock return anomalies. Our findings suggest that these frameworks could be useful to researchers who want to explain anomalies with risk.…”

“…Stock returns are unconditionally higher on earnings announcement days (Lamont and Frazzini ()). Savor and Wilson () attempt to explain this fact. This is not the effect that we document nor the one we want to explain; our main specifications control for this effect through the use of earnings announcement dummy variables.…”

The Earnings Announcement Return Cycle

“…See, for example,Beaver (1968),Foster, Olsen, and Shevlin (1984), Thomas (1989, 1990), andDaniel, Hirshleifer, and Subrahmanyam (1998).2 See, for example,Chari, Jagannathan, and Ofer (1988),Ball and Kothari (1991),Cohen, Dey, Lys, and Sunder (2007),Frazzini and Lamont (2007),Barber, De George, Lehavy, and Trueman (2013) andSavor and Wilson (2016).…”