How do markets capitalize earnings information?

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2022
Authors
Silvers, Roger
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I develop a simple measure—the daily earnings response coefficient (ERC)—that captures when the market capitalizes payoffs summarized by earnings. I find wide variation in the capitalization of earnings information across different days of the same annual return horizon. To explore why, I predict daily ERCs as a function of daily market-wide characteristics—information signals, valuation-related factors, and secular patterns. Several findings resemble themes in prior studies and thus help validate the measure. Yet, in contrast to prior work, I find that turbulent (risky) market-wide conditions strengthen the return–earnings relation. I also use daily ERCs to identify novel information spillovers. I find that markets parse bellwether firms’ disclosures into heterogeneous performance implications for industry peers. Finally, I find that daily ERCs covary with fluctuations in the market’s response to a unit of news, which advances risk-based explanations for findings previously attributed to investor (in)attention.
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earnings response coefficients, disclosure externalities, inattention, capital markets
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