How had the COVID-19 pandemic modified investors' reactions and perceptions of news ? Focus on the Post Earnings Announcement Drift

Details

Supervisors

Thewissen, James

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

This paper investigates the behavior of investors toward news during the pandemic. Previous research found that COVID-19 increased uncertainty making investors and analysts unsure about news value and implications (Brennan, Edgar, & Power, 2022; Xu, Chen, Zhang, & Zhao, 2021). Consequently, the accuracy of their forecasts decreased, reducing their confidence regarding their decision-making abilities (Hao et al., 2022; Wang & Wang, 2020). This lack of consensus among financial actors could potentially impact the overall market stability. Therefore, understanding investors’ perceptions and reactions may help in mitigating some adverse consequences observed in past crises (Arner, 2009). This is why this study initially examined the reaction of investors to global news during the pandemic using the prospect theory. As various reactions were observed, we focused on the analysis of earnings news announcements and their following reactions. This was conducted through the study of potential variations in the magnitude and sign of the post-earnings announcement drift (PEAD) during the COVID crisis. We have based our paper on 41266 quarterly earnings news announcements of listed US companies from 2010 to 2021, covering both pre and pandemic periods. Our main findings indicate that the positive pre-COVID PEAD significantly declined during the pandemic, ultimately disappearing by the first quarter of 2021. Surprisingly, in our attempt to provide an explanation for this outcome, we found that unexpected earnings have a positive impact on PEAD. This suggests an increased investor sensitivity to earnings announcements during the pandemic, which contradicts our prior findings. More specifically, based on prospect theory, investors reacted more strongly to positive earnings news while showing no reaction to negative news. Additionally, we investigated the influence of firm size and analyst coverage on this result. Unexpected earnings for small firms had a positive influence on the PEAD, confirming the inverse relationship between firm size and this anomaly. Conversely, in the scenario with low analyst coverage, the error median had a significant negative impact. Overall, our conclusion highlights the significant influence of the COVID-19 pandemic on investors’ perceptions and reactions, specifically regarding earnings news. Whilst we do not provide a complete explanation for the market anomaly of PEAD, our findings offer valuable insights and observations about its evolution and dynamics.