Are good-news firms riskier than bad-news firms?

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This paper examines the relative risk of good-news firms, i.e., those with high standardized unexpected earnings (SUE), and bad-news (low SUE) firms using a stochastic discount factor approach. We find that a stochastic discount factor constructed from a set of basis assets helps explain post-earnings-announcement drift (PEAD). The risk exposures on the pricing kernel increase monotonically from the lowest to highest SUE sorted portfolios. Specifically, good-news firms always have higher risk exposures than bad-news firms in both 10 SUE sorted portfolios and 25 size and SUE sorted portfolios. However, the estimated expected risk premium is too small to explain the observed magnitude of returns on the PEAD strategy. Our risk adjustment can explain only about one-fourth of the total magnitude of the average realized return to the PEAD strategy. As a result, the average risk-adjusted returns of earnings momentum strategies are mostly positive and significant. Overall, our results support the view that at least some portion of the returns to the earnings momentum strategies examined represent compensation for bearing increased risk. (C) 2012 Elsevier B.V. All rights reserved.
Publisher
ELSEVIER SCIENCE BV
Issue Date
2012-05
Language
English
Article Type
Article
Keywords

EARNINGS-ANNOUNCEMENT DRIFT; STOCHASTIC DISCOUNT FACTORS; CROSS-SECTION; PORTFOLIO PERFORMANCE; MARKET-EFFICIENCY; MOMENTUM PROFITS; EQUITY RETURNS; STOCK-MARKET; MODELS; STRATEGIES

Citation

JOURNAL OF BANKING & FINANCE, v.36, no.5, pp.1528 - 1535

ISSN
0378-4266
DOI
10.1016/j.jbankfin.2011.12.017
URI
http://hdl.handle.net/10203/101718
Appears in Collection
MT-Journal Papers(저널논문)
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