The price momentum and discounting effects on stock prices after earnings announcements: an empirical analysis

Abstract

The purpose of this study is to test price momentum and the discounting effects on the stock prices of a firm immediately after its quarterly earnings announcement. The approach is holistic and cross-sectional. The model consists of a series of regressions in which the dependent variables were of several differing durations of price reaction periods and the explanatory variables account for timing effects, price momentum, market co-movement, earnings forecast, analyst effects, forecast revisions, earnings surprises and sectoral differences. There is evidence that points to mid- and long-term momentum that extend a day or two after the earnings release. After that point, there seems to be a net discounting effect. That is, there is evidence of an inverse relationship between the price change prior to the earnings announcement and the price change after the earnings announcement.

Keywords:

• price momentum
• discounting effects
• earnings announcement
• stock prices
• earnings surprises

JEL Classification:

• C12
• G13
• G14