Driven to Distraction: Extraneous Events and Underreaction to Earnings News

TLDR

Limited investor attention and extraneous news are proposed to cause market underreactions, inhibiting reactions to relevant earnings announcements. The study tests the distraction hypothesis by measuring investors’ information load during earnings announcements. The authors evaluate distraction effects by implementing a trading strategy that captures significant alphas. When multiple firms announce earnings on the same day, price and volume reactions are weaker and post‑announcement drift is stronger, especially with industry‑unrelated news or large surprises, and a trading strategy exploiting these distraction effects yields substantial alphas.

Abstract

ABSTRACT Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The investor distraction hypothesis holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm's earnings surprise is much weaker, and post‐announcement drift much stronger, when a greater number of same‐day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry‐unrelated news and large earnings surprises have a stronger distracting effect.