Uncertainty and the Earnings Announcement Premium

55 Pages Posted: 24 Jul 2019 Last revised: 14 Feb 2023

See all articles by David L. Dicks

David L. Dicks

Baylor University - Department of Finance, Insurance & Real Estate

Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate

Date Written: February 13, 2023

Abstract

We test if investors are uncertainty averse about corporate cash flows by considering earnings announcements. Without uncertainty, announcement returns positively predict future investment, but uncertainty can reverse this relationship. Empirically, the earnings announcement return negatively predicts future investment, rejecting expected utility in favor of uncertainty aversion. Earnings announcements, as pure news events, are priced only if investors are uncertainty averse: announcement returns are higher for firms with more dispersed analyst forecasts, greater political risk, small firms, complex firms, and firms listed on NASDAQ or AMEX. Therefore, the earnings announcement return is a noisy signal of firm-specific uncertainty.

Keywords: Ambiguity Aversion, Earnings Announcements, Investment

JEL Classification: D81, G14, G31

Suggested Citation

Dicks, David L. and Kim, Hwanki Brian, Uncertainty and the Earnings Announcement Premium (February 13, 2023). Available at SSRN: https://ssrn.com/abstract=3424379 or http://dx.doi.org/10.2139/ssrn.3424379

David L. Dicks (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

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