Studies of negative earnings surprises have shown that there is
A) a negative abnormal return on the day that 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) a negative abnormal return on the day that negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.
E) a negative abnormal return on the day that negative earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.

Question

Quizplus · Accepted Answer

Studies have shown that when companies announce earnings that are below expectations (negative earnings surprises), there is typically a negative abnormal return on the announcement day. This means the stock price drops more than what would be expected based on market movements alone. Following the announcement, the stock price tends to continue to drift lower, indicating a negative drift in the days after the announcement. This reflects the market's adjustment to the new, lower-than-expected earnings information.

Studies of Negative Earnings Surprises Have Shown That There Is