Earnings Disaggregation and Market Efficiency
52 Pages Posted: 2 Dec 2020
Date Written: October 14, 2020
Using the earnings disaggregation model in Jackson, Plumlee and Rountree (2018), we investigate investors’ incorporation of the market, industry and firm-idiosyncratic components of earnings in their stock pricing decisions. We find results consistent with Jackson et al. (2018), showing the firm-idiosyncratic component of earnings is less persistent than the other two earnings components. However, we find that investors fail to correctly react to the actual persistence of the market and firm-idiosyncratic components of earnings as reflected in their stock pricing behavior. Investors are found to underweight the market and firm-idiosyncratic components of earnings but do not incorrectly weight the industry component of earnings. Correspondingly, we find that significant positive abnormal returns can be earned by taking a long (short) position in firms with higher (lower) levels of firm-idiosyncratic earnings consistent with the firm-idiosyncratic earnings component containing higher information uncertainty.
Keywords: Macroeconomy, Market, Industry, Profitability, Efficiency, Pricing
JEL Classification: M41
Suggested Citation: Suggested Citation