The Effect of Returns History on the Current Period Relation Between Returns and Unexpected Earnings

Abstract

This study applies a model of systematic belief revision to examine the effect of the relation between current‐period unexpected earnings and prior‐period security returns on the current period relation between those unexpected earnings and returns. Cross‐sectional analysis blurs the effects of past information on current returns in a manner that makes it easy to overlook any dependence on historical patterns in this information. We show that the market responds to earnings innovations conditional on these patterns but does not respond in the manner predicted by the Hogarth and Einhorn (1992) belief adjustment model. Nonetheless, the results suggest that individual decision processes are detectable in capital markets data.

Citation

Calk, R., Haensly, P. and Jo Billiot, M. (2007), "The Effect of Returns History on the Current Period Relation Between Returns and Unexpected Earnings", Accounting Research Journal, Vol. 20 No. 1, pp. 5-20. https://doi.org/10.1108/10309610780000686