Investigación

We investigate the relationship between investor attention and stock returns in the context of extreme earnings surprises. We propose a novel mechanism that describes this interaction: high attention to very positive and very negative earnings news results in faster incorporation of information into stock prices, an overreaction effect, and a subsequent partial reversal. We test this mechanism using post-announcement abnormal returns and measure investor attention using internet search volume. We confirm that abnormal attention to earnings announcements is positively related to post-announcement abnormal returns when earnings surprises are very positive and negatively related when earnings surprises are very negative. More importantly, we argue that investors exhibit attention-driven overreactions to these extreme earnings surprises since the initial effects of abnormal attention on abnormal returns are subsequently partially reversed.