Investor Reactions to Earnings Surprises: A Learning Perspective

This thesis investigates investor reactions to earnings announcements from a learning perspective. I find that negative earnings surprises exert larger impact on stock returns of younger firms than those that are positive. This asymmetry decreases over the course of firm’s aging. I also find that among investors, institutional traders are more responsive to earnings surprises in the direction of the surprise sign. The decreasing differential in the institutional investors’ reaction to the opposite surprise signs over the course of company’s aging indicates that this investor class resolves their uncertainty about stocks’ actual profitability during earnings announcements.

Overall, contrary to Lakonishok et al. (1994), I find no evidence that investors overreacting to good/bad news are naïve, and thereby that the return differential between growth (glamour) and value stocks arises due to their naivety. Instead, results of my analyses suggest that such investors are sophisticated and well informed. Building on Pástor and Veronesi (2003), I find that the asymmetry in the magnitudes of overreaction to unexpected earnings surprises for different stock categories and the return differential between growth and value stocks appear to stem from resolving uncertainty about stocks’ true profitability during quarterly earnings announcements.