Study: Good Numbers in Earnings Announcements Boost Stock Price, But Benefits Fade Fast

By:
Chris Gaetano
Published Date:
Oct 10, 2018
blur-business-chart-69760

A study has found that a company announcing "earnings are up 16 percent" will get a better stock price bump than one that just says "earnings are up," but the gains evaporate after about two months, and then transform into actual loss, as the share price ends up lower than it was initially, according to CFO.com. The study, set to be published in the Accounting Review, looked at 17,000 earnings releases, of which 28 percent cited some sort of performance number, such as the degree to which earnings exceeded analyst expectations. It found that earnings release headlines that included such numbers added, on average, one third to the company's stock value after three days, but then, over the following 60 days, this gain tended to reverse until the price was even lower than it was before. The paper said this could be due to investor overreaction, as they pay more attention to the highlighted number than other, potentially problematic, aspects of the report. 

The study also observed that managers appear to be aware of this effect on some level, as headline numbers correlate highly with insider stock sales in the month following the report, as well as with recent vesting of executives' stock. “At the time of earnings announcements, investors do not fully appreciate managers’ opportunistic incentive to highlight temporary good performance," the study's authors said.

Click here to see more of the latest news from the NYSSCPA.