Asset Pricing on Earnings Announcement Days

Abstract

Market betas have a strong and positive relation with average stock returns on a handful of days every year. Such unique days, defined here as leading earnings announcement days or LEADs, are times when an aggregate of influential S&P500 firms disclose quarterly earnings news early in the earnings season. LEADs happen also to be times when institutional investors’ attention is high. The positive return-to-beta relation holds for various test portfolios, individual stocks, and Treasuries; and is robust to different data frequencies and testing procedures. On days other than LEADs, the relation between beta and average returns is flat. We conclude that waves of early earnings announcements by large firms clustered on LEADs have a significant influence on pricing individual assets.

Keywords: Capital asset pricing model; Earnings announcements; Security market line; Market beta.

JEL Classification: G10; G12; G14