Total attention: The effect of macroeconomic news on market reaction to earnings news

Linda H. Chen, George J. Jiang*, Kevin X. Zhu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

16 Citations (Scopus)

Abstract

We show evidence that consistent with category-learning behavior, investors allocate more attention to macroeconomic news than to firm-specific news, such as earnings announcements. Despite the distracting effect of macroeconomic news on investor attention, we find that earnings announcements with concurrent macroeconomic news announcements actually have significantly stronger immediate market response and weaker post-earnings announcement drift. We hypothesize that the combined total attention to macroeconomic news and earnings announcements helps investors understand both the systematic and firm-specific components of earnings surprises. Consistent with the hypothesis, our results show that the macroeconomic news effect is mainly driven by firms with high exposure to macroeconomic news. Moreover, we show that the effect is stronger when macroeconomic news contains more information and for firms with greater information uncertainty. Finally, we provide evidence that macroeconomic news helps reduce stock return uncertainty and enhance stock price efficiency.

Original languageEnglish
Pages (from-to)142-156
Number of pages15
JournalJournal of Banking and Finance
Volume97
DOIs
Publication statusPublished - Dec 2018

Keywords

  • Category-learning behavior
  • Earnings announcement
  • Limited investor attention
  • Macroeconomic news announcement
  • Market reaction

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