Market Reactions to Innovative Firms' Earnings News Marcus Caylor, Duanping Hong, Hyungshin Park, and Hong Qu
Coles Working Paper Series, FALL22-05, November 2022
OVERVIEW
Keynes (1936) predict that investors will overreact to public information in valuing stock as they try to guess other investors’ beliefs. We examine this prediction in the context of disruptive technology firms. We predict that due to their uncertain business and valuation models, publicly available information on these firms should lead to stronger market reactions than other firms. Consistent with this prediction, we find that disruptive technology firms’ earnings announcements prompt strong price reactions and high trading volume. Our results also indicate that even sophisticated market participants, such as financial analysts, overreact to public information in stock valuation. Their target price forecast revisions, but not their earnings forecast revisions, are more sensitive to earnings news about disruptive technology firms. Moreover, the dispersion of stock recommendations relative to profitability forecasts is narrower for disruptive technology firms than their counterparts, consistent with overweighting public information.
52 | Working Papers
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