STOCK RETURNS, AGGREGATE EARNINGS SURPRISES, AND BEHAVIORAL FINANCE
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4284-03.pdf
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Author(s)
Kothari, S.P.
Lewellen, Jonathan
Warner, Jerold
Date Issued
February 20, 2003
Series/Report no.
MIT Sloan School of Management Working Paper;4284-03
Abstract
We study the stock market reaction to aggregate earnings news. Previous research shows that,
for individual firms, stock prices react positively to earnings news but require several quarters
to fully reflect the information in earnings. We find that the relation between returns and
earnings is substantially different in aggregate data. First, returns are unrelated to past
earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news.
Second, aggregate returns are negatively correlated with concurrent earnings; over the last 30
years, stock prices increased 6.5% in quarters with negative earnings growth and only 1.9%
otherwise. This finding suggests that earnings and discount rates move together over time, and
provides new evidence that discount-rate shocks explain a significant fraction of aggregate
stock returns
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