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Economic policy uncertainty, investor attention and post-earnings announcement drift

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  • Du, Xiuli
  • Ao, Zhu
  • Chai, Yiwei
  • Ge, Shilong

Abstract

How the market incorporates information into stock price is a core issue in finance. This study focuses on the impact of economic policy uncertainty (EPU) on the stock prices information efficiency of China's A-share market and underlying role of investors' attention allocation mechanism. This study analyzes the information efficiency of stock prices using the sensitivity of stock cumulative abnormal return to earnings information across different windows following earnings announcement. Based on the earnings announcement events of listed companies in China's A-share market, this study presents an empirical study of the aforementioned issues using event study and regression analysis methods. The following results are seen: (1) EPU aggravates the underreaction of stock price earnings information and the post-earnings announcement drift in the A-share market. (2) Under highly uncertain economic policies, investors show a limited attention allocation pattern of devoting increasing attention to macroeconomic policies and decreasing attention to earnings information, which leads to a decrease in the information efficiency of stock price. This study also analyzes the heterogeneity of the influence of EPU on stock price information efficiency using the institutional shareholding ratio. The results show that increasing institutional shareholding does not reduce the adverse effects of EPU on the information efficiency of stock prices. This study not only provides empirical evidence for Brunnermeier, Sockin, and Xiong (2022) and rational inattention theory, but also reveals that institutional investors show similar behavioral characteristics to retail investors in China's stock market. The results of this study have policy significance for improving the information efficiency of stock market.

Suggested Citation

  • Du, Xiuli & Ao, Zhu & Chai, Yiwei & Ge, Shilong, 2023. "Economic policy uncertainty, investor attention and post-earnings announcement drift," International Review of Financial Analysis, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finana:v:87:y:2023:i:c:s105752192300131x
    DOI: 10.1016/j.irfa.2023.102615
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    3. Yunpeng Su & Jia Li & Baochen Yang & Yunbi An, 2024. "The Impacts of Policy Uncertainty on Asset Prices: Evidence from China’s Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(4), pages 1087-1133, December.
    4. Chen, Jingchao & Jia, Li, 2024. "Investor-listed company interaction and post-earnings announcement drift for individual stocks," Finance Research Letters, Elsevier, vol. 62(PA).
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    7. Wang, Zhixiao & Kong, Dongmin & Liu, Shasha, 2024. "Corporate social responsibility and firm-level systematic risk: The moderating effect of economic policy uncertainty," International Review of Financial Analysis, Elsevier, vol. 94(C).
    8. Shrestha, Keshab & Naysary, Babak, 2023. "ESG and economic policy uncertainty: A wavelet application," Finance Research Letters, Elsevier, vol. 58(PD).

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