Do earnings events reset the trading clock?

Mike Lipkin; Arjun K. M.; Leon Tatevossian

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Trading volumes of both stocks and vanilla options consistently increase prior to, and remain elevated just after, quarterly earnings announcements. Often the stock price will trend into the announcement.
We examine a large collection of earnings events (approx. 14000 observations, spanning three widely-spaced years) and extract the subset of outcomes for which the price sharply increased or declined into the earnings date.
The analysis suggests that no momentum is retained, neither in the earnings return nor in the subsequent short-horizon return.
On an aggregate basis earnings events appear to reset the trading clock.

Abstract

Larger-than-normal trading volumes of both stocks and vanilla options prior to, and just after, quarterly earnings announcements suggest there are profits to be mined from these singular events. Often a stock price will “trend into the announcement”. Does trending matter? For this exercise we examine a large collection of earnings events (approximately 14 000 observations, from three widely disparate discrete years) and extract the subset of outcomes for which the price strongly increased or declined into the earnings date. Our conclusion: no momentum is retained, either in the realized return over the announcement (which we label the “earnings return” or “jump”) or in the subsequent short-horizon price performance.

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