Macro News and Micro News: Complements or Substitutes?

Hirshleifer, David and Sheng, Jinfei (2016): Macro News and Micro News: Complements or Substitutes? Forthcoming in: Journal of Financial Economics

Abstract

We study how the arrival of macro-news affects the stock market’s ability to incorporate the information in firm-level earnings announcements. Existing theories suggest that macro and firm-level earnings news are attention substitutes; macro-news announcements crowd out firm-level attention, causing less efficient processing of firm-level earnings announcements. We find the opposite: the sensitivity of announcement returns to earnings news is 17% stronger, and post-earnings announcement drift 71% weaker, on macro-news days. This suggests a complementary relationship between macro and micro news that is consistent with either investor attention or information transmission channels.

• Item Type: MPRA Paper
• Language: English
• Keywords: macro news, earnings announcements, market efficiency, investor attention, complementary relationship
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

References

Ball, R., Brown, P., 1968. An empirical evaluation of accounting numbers. Journal of Accounting Research. 6, 159–178. Bernard, V.L., Thomas, J.K., 1989. Post-earnings-announcement drift: Delayed price response or risk premium? Journal of Accounting Research. 27, 1–36. Bernard, V.L., Thomas, J.K., 1990. Evidence that stock prices do not fully reflect the implications of current earnings for future earnings. Journal of Accounting and Economics. 13, 305-340. Ben-Rephael, A., Da, Z., Israelsen, R.D., 2017. It depends on where you search: A comparison of institutional and retail attention. Review of Financial Studies. 30, 3009-3047. Bhushan, R., 1989. Firm characteristics and analyst following. Journal of Accounting and Economics. 11.2-3, 255-274. Birru, J., 2018. Day of the week and the cross-section of returns, Journal of Financial Economics. 130, 182-214. Boguth, O., Duchin, R., Simutin, M., 2020. Dissecting conglomerates valuations, Journal of Finance. forthcoming. Boyd, J.H., Hu, J., Jagannathan, R., 2005. The stock market’s reaction to unemployment news: Why bad news is usually good for stocks. Journal of Finance. 60, 649-672. Chan, W. S., 2003. Stock price reaction to news and no-news: drift and reversal after headlines. Journal of Financial Economics. 70, 223-260. Cieslak, A., Morse, A., Vissing-Jogensen, A., 2019. Stock returns over the FOMC cycle. Journal of Finance. 74, 2201-2248. Corwin, S.A., Coughenour, J.F., 2008. Limited attention and the allocation of effort in securities trading. Journal of Finance 63, 3031-3067. Da, Z., Engelberg, J., Gao, P., 2011. In search of attention, Journal of Finance. 66, 1461-1499. deHaan, E., Shevlin, T., Thornock, J., 2015. Market (in) attention and the strategic scheduling and timing of earnings announcements. Journal of Accounting and Economics. 60, 36-55. DellaVigna, S., Pollet, J.M., 2009. Investor inattention and Friday earnings announcements. Journal of Finance. 64, 709-749. Drake, M.S., Roulstone, D.T., Thornock, J.R., 2012. Investor information demand: Evidence from Google searches around earnings announcements. Journal of Accounting Research. 50,1001-1040. Engelberg, J., McLean, R.D., Pontiff, J., 2018. Anomalies and news, Journal of Finance. 73, 1971-2001. Fama, E.F., 1970. Efficient capital markets: A review of theory and empirical work. Journal of Finance. 25, 383-417. Fama, E. F., French, K.R., 1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics. 33, 3-56. Fisher, A.J., Martineau, C., Sheng, J., 2021. Macroeconomic attention and announcement risk premia. Working paper. University of British Columbia. Frazzini, A., Lamont, O.A., 2007. The earnings announcement premium and trading volume. Working paper. NBER. Gilbert, T., 2011. Information aggregation around macroeconomic announcements: Revisions matter. Journal of Financial Economics. 101, 114-131. Gilbert, T., Scotti, C., Strasser, G., Vega, C., 2017. Is the intrinsic value of macroeconomic news announcements related to their asset price impact? Journal of Monetary Economics. 92, 78-95. Goldstein, I., Yang, L., 2015. Information diversity and complementarities in trading and information acquisition. Journal of Finance. 70, 1723-1765. Griffin, JM., Nardari, F., Stulz, R.M., 2007. Do investors trade more when stocks have performed well? Evidence from 46 countries. Review of Financial Studies. 20, 905-951. Gulen, H., Hwang, B., 2012. Daily stock market swings and investor reaction to firm-specific news. Working paper. Purdue University. Hartzmark, S.M., Shue, K., 2018. A tough act to follow: Contrast effects in financial markets. Journal of Finance. 73, 1567-1613. Hu, G.X., Pan, J., Wang, J., Zhu, H., 2021. Premium for Heightened Uncertainty: Explaining Pre-Announcement Market Returns. Working paper. MIT. Huang, S., Huang, Y., Lin, T., 2019. Attention allocation and return co-movement: Evidence from repeated natural experiments. Journal of Financial Economics. 132, 369-383. Hillert, A., J., Müller., 2014. Media makes momentum. Review of Financial Studies. 27, 3467-3501. Hirshleifer, D., Teoh, S.H., 2003. Limited attention, information disclosure, and financial reporting, Journal of Accounting and Economics 36, 337-386. Hirshleifer, D., Lim, S., Teoh, S.H., 2009. Driven to distraction: Extraneous events and underreaction to earnings news. Journal of Finance. 64, 2289-2325. Hirshleifer, D., Lim, S., Teoh, S.H., 2011. Limited investor attention and stock market misreactions to accounting information. Review of Asset Pricing Studies. 1, 35-73. Johnson, T.L., So, E.C., 2018. Time will tell: Information in the timing of scheduled earnings news. Journal of Financial and Quantitative Analysis. 53, 2431-2464. Kempf, E., Manconi, A., Spalt, O., 2017. Distracted shareholders and corporate actions. Review of Financial Studies. 30, 1660–1695. Liu, H., Peng, L., Tang, Y., 2019. Retail Attention, Institutional Attention. Working paper. Baruch College. Lucca, D.O., Moench, E., 2015. The Pre‐FOMC announcement drift. Journal of Finance. 70, 329-371. Peng, L., Xiong, W., 2006. Investor attention, overconfidence and category learning. Journal of Financial Economics. 80, 563-602. Peress, J., Schmidt, D., 2020. Glued to the TV: Distracted noise traders and stock market liquidity. Journal of Finance. 75, 1083-1133. Rosch, D.M., Subrahmanyam, A., van Dijk, M.A., 2017. The dynamics of market efficiency. Review of Financial Studies. 30, 1151–1187. Sadka, R., 2006. Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk. Journal of Financial Economics. 80, 309-349. Savor, P., Wilson, M., 2013. How much do investors care about macroeconomic risk? Evidence from scheduled economic announcements. Journal of Financial and Quantitative Analysis. 48, 343-375. Savor, P., Wilson, M., 2014. Asset pricing: A tale of two days, Journal of Financial Economics. 113, 171-201. Schmalz, M.C., Zhuk, S., 2018. Revealing downturns. Review of Financial Studies. 32, 338-373. Sims, C.A., 2003. Implications of rational inattention. Journal of Monetary Economics. 50, 665–690. Statman, M., Thorley, S., Vorkink, K., 2006. Investor overconfidence and trading volume. Review of Financial Studies. 19, 1531-1565.