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Inconsistent Signals, Earnings Announcements, and Market Uncertainty

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  • Wen He
  • Andrew B. Jackson
  • Kevin Liang

Abstract

We test the proposition in Johnstone (2016) that new information may lead to higher, rather than lower, uncertainty about firms’ future payoffs. Based on the Bayesian rule, we hypothesize earnings news that is inconsistent with investors’ prior belief will lead to higher market uncertainty. Using earnings signals in the past few quarters to proxy for investors’ prior belief, we find supporting evidence that, relative to consistent earnings news, inconsistent news results in an increase in market uncertainty measured by implied volatility. Inconsistent earnings news has a larger effect on market uncertainty when prior beliefs are stronger and when the news is negative. Overall, our evidence highlights the importance of prior belief and inconsistent signals in understanding the effect of earnings news on market uncertainty.

Suggested Citation

  • Wen He & Andrew B. Jackson & Kevin Liang, 2019. "Inconsistent Signals, Earnings Announcements, and Market Uncertainty," Abacus, Accounting Foundation, University of Sydney, vol. 55(2), pages 411-435, June.
    • Handle: RePEc:bla:abacus:v:55:y:2019:i:2:p:411-435
    DOI: 10.1111/abac.12156
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    Cited by:

    1. Neururer, Thaddeus, 2022. "Meet-or-beat streak heterogeneity and equity prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 455-470.

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