Studies of negative earnings surprises have shown that there is A. a negative ab
ID: 1099010 • Letter: S
Question
Studies of negative earnings surprises have shown that there is
A. a negative abnormal return on the day negative earnings surprises are announced.
B. a positive drift in the stock price on the days following the earnings surprise announcement.
C. a negative drift in the stock price on the days following the earnings surprise announcement.
D. both a negative abnormal return on the day negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.
E. both a negative abnormal return on the day negative earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.
YOU MUST EXPLAIN IN YOUR OWN WORDS (I.E. DO NOT JUST GOOGLE THE QUESTION AND GIVE THE ANSWER YOU FIND THERE OR I WON'T AWARD POINTS)
Explanation / Answer
The correct answer is D. When negative surprise earning are announced, the market reacts and prices fall to reflect the new prices. But due to negative sentiments in the market, people tend to over react and sell more, thus due to this selling spree, prices fall more than they should have. But as the fundamentals still remain the same, eventually prices increase by having a positive drift to finally reflect the true prices.