THE JOURNAL OF FINANCE • VOL. LXIV, NO. 5 • OCTOBER 2009
Driven to Distraction: Extraneous Events and
Underreaction to Earnings News
DAVID HIRSHLEIFER, SONYA SEONGYEON LIM, and SIEW HONG TEOH∗
Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The investor distraction hypothesis holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm’s earnings surprise is much weaker, and post-announcement drift much stronger, when a greater number of same-day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry-unrelated news and large earnings surprises have a stronger distracting effect.
[Attention] is the taking possession by the mind in clear and vivid form, of one out of what seem several simultaneously possible objects or trains of thought . . . It implies withdrawal from some things in order to deal effectively with others. William James, Principles of Psychology, 1890
Almost a quarter of British motorists admit they have been so distracted by roadside billboards of semi-naked models that they have dangerously veered out of their lanes.
Reuters (London), November 21, 2005
IN SEVERAL KINDS of tests, there is on average a delayed price reaction to news that has the same sign as the immediate response. This phenomenon is ref lected in the new issue and repurchase puzzles (Loughran and Ritter (1995), Ikenberry, ∗ Hirshleifer and Teoh are at Paul Merage School of Business, University of California, Irvine and Lim is at Kellstadt Graduate School of Business, DePaul University, Department of Finance, Chicago, Illinois. We thank an anonymous referee; Nick Barberis; Nerissa Brown; Werner DeBondt; Stefano DellaVigna (NBER conference discussant); Laura Field; Wayne Guay (FRA conference discussant); Campbell Harvey (the editor); Christo Karuna; Erik Lie; Yvonne Lu; Ray Pfeiffer (FARS conference discussant); Mort Pincus; Charles Shi; and seminar participants at the Merage School of Business at UC Irvine, DePaul University, the Anderson Graduate School of Management at UCLA, the Sauder School of Business at University of British Columbia, the University of Kansas, and conference participants at the 10th Biennial Behavioral Decision Research in Management Conference at Santa Monica, California, the NBER Behavioral Finance November 2006 Meeting at Cambridge, Massachusetts, the Financial Research Association 2006 Conference at Las Vegas, Nevada, the Financial Accounting and Reporting Section 2007 Conference at San Antonio, Texas, and the Chicago Quantitative Alliance conference at Chicago for very helpful comments.
The Journal of Finance R
Lakonishok, and Vermaelen (1995)), abnormal returns following various types of corporate events such as stock splits and bond ratings changes (Desai and Jain (1997), Dichev and Piotroski (2001)), return momentum (Jegadeesh and Titman (1993)), and post-earnings announcement drift (Bernard and Thomas (1989)). Evidence on stock return lead-lags suggests that information diffuses gradually across industries, between large and small firms, between economically linked firms, and between firms that are followed by different numbers of analysts.1 The idea that these phenomena represent irrational underreaction by investors has stimulated a great deal of research and debate. A recent literature has proposed that limited investor attention offers a possible explanation for these anomalies. Recent theoretical models examine how limited attention can cause underreactions to news as well as other effects on prices. These models predict that investor neglect of information signals can lead to mispricing that is related to publicly available accounting...
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