Dissertation/Thesis Abstract

Asymmetric responses to earnings news: A case for ambiguity
by Williams, Christopher D., Ph.D., The University of North Carolina at Chapel Hill, 2009, 73; 3366461
Abstract (Summary)

In this paper I empirically investigate whether investors change the way they respond to earnings releases following changes in “ambiguity” in a manner consistent with extant research that distinguishes risk from ambiguity. With risk, decision-makers possess known probabilities and formulate unique prior distributions over all possible outcomes. In contrast, with ambiguity, decision-makers possess incomplete knowledge about probabilities and are unable to formulate priors over all possible outcomes. Existing theoretical research supports the hypothesis that investors respond differentially to good versus bad news information releases when confronted with ambiguity. As a proxy for ambiguity I use the volatility index (VIX). I provide evidence that following increases in VIX investors respond asymmetrically, weighting bad earnings news more than good earnings news. Conversely, following a decrease in VIX investors respond symmetrically to good and bad earnings news. Results are robust to consideration of both risk and investor sentiment explanations. I also document that the effect of ambiguity is intensified for firms with a high systematic component to earnings, and is mitigated for firms with high trading volume over the event window. This study provides large sample, empirical evidence that ambiguity changes how market participants process earnings information.

Indexing (document details)
Advisor: Bushman, Robert M., Landsman, Wayne R.
Commitee: Conrad, Jennifer, Lang, Mark, Stubben, Steve
School: The University of North Carolina at Chapel Hill
Department: Business Administration
School Location: United States -- North Carolina
Source: DAI-A 70/07, Dissertation Abstracts International
Source Type: DISSERTATION
Subjects: Accounting, Economics, Finance
Keywords: Ambiguity, Asymmetry, Earnings responses, Information processing, Preferences, Risk
Publication Number: 3366461
ISBN: 9781109277425