Event-Specific Uncertainty and its Expected Resolution

44 Pages Posted: 18 Nov 2016 Last revised: 29 Mar 2019

See all articles by Michael Iselin

Michael Iselin

University of Minnesota - Twin Cities - Department of Accounting

Andrew Van Buskirk

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: March 26, 2019

Abstract

Standard models of Bayesian updating predict a stronger investor reaction to new information when those investors are more uncertain about the firm. However, prior empirical literature has struggled to find widespread evidence in support of this prediction. This paper tests two explanations for this lack of empirical support. The first explanation is that extant measures of uncertainty tend to also capture noise in the reporting system, which has a negative relation with investors’ response to new information. The second explanation is that when investors face high levels of overall uncertainty, earnings announcements do little to resolve that uncertainty. We provide evidence consistent with the latter explanation. We develop two measures of “event-specific uncertainty” - the amount of uncertainty expected to be resolved at an upcoming event - and show that this uncertainty construct is positively related to both earnings response coefficients and the informativeness of earnings announcements as a whole.

Keywords: uncertainty, earnings announcements, event-specific uncertainty, implied volatility

JEL Classification: G12, G14, M41, D80

Suggested Citation

Iselin, Michael and Van Buskirk, Andrew, Event-Specific Uncertainty and its Expected Resolution (March 26, 2019). Available at SSRN: https://ssrn.com/abstract=2870646 or http://dx.doi.org/10.2139/ssrn.2870646

Michael Iselin (Contact Author)

University of Minnesota - Twin Cities - Department of Accounting ( email )

271 19th Avenue South
Room 645 Mgt. Econ. Building
Minneapolis, MN 55455
United States

Andrew Van Buskirk

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

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