Limited Attention and Post-Earnings Announcement Drift: Evidence from China's Stock Market

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Abstract

This paper utilizes Chinese stock data to provide further evidence on the power of limited attention theory in explaining post-earnings announcement drift. As retail investors prevail in China and they are easily distracted by market swings, we should expect severe attention problems, resulting in larger underreaction to firm information and higher sensitivity to market movement, i.e., the so-called “market movement effect”. After accounting for special arrangements such as preannouncements and earnings previews, we confirm a strong presence of this effect in Chinese stock market, given the “Friday effect” and “announcement concentration effect” being controlled for. Moreover, the effect is asymmetric in market up and down, and becomes more pronounced for small-cap and value stocks.

Keywords: Limited attention, earnings announcement, market movement, China's stock market, abnormal returns

JEL Classifications: C58, G14, G41

DOI: https://doi.org/10.32479/ijefi.10817

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Author Biographies

Qian Chen, Shenzhen Technology University

Qian Chen is an Associate Professor at the Business School, Shenzhen Technology University

Xiang Gao, Shanghai Business School

Xiang Gao is an Associate Professor and the Head of Research Center of Finance at Shanghai Business School

Gangchen Liu, Peking University HSBC Business School

Gangchen Liu is a graduate student at Peking University HSBC Business School

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Published

2021-01-18

How to Cite

Chen, Q., Gao, X., & Liu, G. (2021). Limited Attention and Post-Earnings Announcement Drift: Evidence from China’s Stock Market. International Journal of Economics and Financial Issues, 11(1), 1–17. Retrieved from https://www.econjournals.com/index.php/ijefi/article/view/10817

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