Sell on the news: Differences of opinion, short-sales constraints, and returns around earnings announcements

Henk Berkman, Valentin Dimitrov, Prem C. Jain, Paul D. Koch, Sheri Tice

Research output: Contribution to journalArticlepeer-review

118 Scopus citations

Abstract

Miller [1977. Risk, uncertainty, and divergence of opinion. Journal of Finance 32, 1151-1168] hypothesizes that prices of stocks subject to high differences of opinion and short-sales constraints are biased upward. We expect earnings announcements to reduce differences of opinion among investors, and consequently, these announcements should reduce overvaluation. Using five distinct proxies for differences of opinion, we find that high differences of opinion stocks earn significantly lower returns around earnings announcements than low differences of opinion stocks. In addition, the returns on high differences of opinion stocks are more negative within the subsample of stocks that are most difficult for investors to sell short. These results are robust when we control for the size effect and the market-to-book effect and when we examine alternative explanations such as financial leverage, earnings announcement premium, post-earnings announcement drift, return momentum, and potential biases in analysts' forecasts. Also consistent with Miller's theory, we find that stocks subject to high differences of opinion and more binding short-sales constraints have a price run-up just prior to earnings announcements that is followed by an even larger decline after the announcements.

Original languageEnglish (US)
Pages (from-to)376-399
Number of pages24
JournalJournal of Financial Economics
Volume92
Issue number3
DOIs
StatePublished - Jun 2009

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Keywords

  • Differences of opinion
  • Earnings announcements
  • Institutional ownership
  • Limits to arbitrage
  • Market efficiency
  • Short-sales constraints

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