Articlebronze2002

When Is Bad News Really Bad News?

JENNIFER S. CONRAD · Bradford Cornell · Wayne R. Landsman

298 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Auditing, Earnings Management, Governance Financial Analysis and Corporate Governance

Abstract

We examine whether the price response to bad and good earnings shocks changes as the relative level of the market changes. The study is based on a complete sample of annual earnings announcements during the period 1988 to 1998. The relative level of the market is based on the difference between the current market P/E and the average market P/E over the prior 12 months. We find that the stock price response to negative earnings surprises increases as the relative level of the market rises. Furthermore, the difference between bad news and good news earnings response coefficients rises with the market.

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References

1993Common risk factors in the returns on stocks and bonds 1992The Cross-Section of Expected Stock Returns 1996Multifactor Explanations of Asset Pricing Anomalies 1998Investor Psychology and Security Market Under‐ and Overreactions 1994Contrarian Investment, Extrapolation, and Risk n.d.A model of investor sentiment /1995Size and Book-to-Market Factors in Earnings and Returns 1998A model of investor sentiment1We are grateful to the NSF for financial support, and to Oliver Blanchard, Alon Brav, John Campbell (a referee), John Cochrane, Edward Glaeser, J.B. Heaton, Danny Kahneman, David Laibson, Owen Lamont, Drazen Prelec, Jay Ritter (a referee), Ken Singleton, Dick Thaler, an anonymous referee, and the editor, Bill Schwert, for comments.1

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