2 the remaining 134 of the observations have no

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2 The remaining 13.4% of the observations have no change in dispersion. The stock price effects of changes in dispersion of investor beliefs 3 123
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We supplement our full sample tests by employing a specialized sample where reported earnings exactly equal analysts’ forecasts, and analysts’ forecast revisions of next quarter’s earnings are negligible. In other words, these observations report earnings that appear to contain no new information about the amounts and timing of future cash flows. 3 While a substantial proportion of all earnings announcements fall into the zero-surprise category (approximately 12% for our sample), no prior study has exclusively focused on this specialized sample. Moreover, by holding forecast errors and forecast revisions constant across the sample, our supplemental tests benefit from enhanced internal validity and more effective controls for nonlinear- ities within the returns-earnings relation. For the zero-surprise sample, we find considerable cross-sectional variation in the announcement period returns. Specifically, the market-adjusted return from 1 day before to 1 day after the earnings announcement date for our zero-surprise sample ranges from - 7.65% for the 10th percentile firm to 7.00% for the 90th percentile firm. Considering these returns are measured over a 3-day period, this range of almost 15% represents variation that is economically significant but cannot be explained by analysts’ forecast errors. Consistent with our primary results, we find for the zero- surprise sample that equity returns are negatively associated with changes in dispersion of investor beliefs. Thus, our evidence indicates that some of the earnings announcement return variation can be explained in a predictable manner. The remainder of this paper is organized as follows. In the next section, we review the relevant literature and discuss hypotheses with respect to the effect of dispersion in investor beliefs on stock prices during earnings announcements. We present our research design in Sect. 3. We discuss the procedures used to identify our sample observations and the empirical results in Sect. 4. The final section summarizes our conclusions. 2 Review of prior literature The existing literature in accounting and finance proposes various theories about how dispersion of investor beliefs might affect stock prices. Consider the following simple earnings valuation model: 4 P t ¼ X 1 s ¼ 1 E t X t þ s ð Þ 1 þ r t ð Þ s ð 1 Þ where P represents price, X is accounting earnings, E is an expectations operator, r is the firm’s discount rate, and t denotes time period. Equation 1 shows that earnings announcements will induce a price reaction when there is a change in either investors’ expectations of future earnings or the discount factor.
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