The Effect of Corporate Earnings Announcements on the Volatility of Equity Prices: A New Methodology for More Accurate and Reliable Predictions

Abstract

This study examines the effect of corporate earnings announcements on volatility of equity prices. It examines the dynamics of why stock prices of certain publicly listed companies are very sensitive to new information and others seemingly not at all. While the economic literature is rich in the study of the asymmetrical nature of information and its effect on the actions of market participants, there is gap in the literature about how information has a differential effect on the actions of investors based on the endogenous characteristics of individual companies. Using multiple regression analysis with panel data, this study examines the historical stock price movements of all the companies listed on the NASDAQ stock exchange from December 31, 2012 to December 31, 2018 and identifies the characteristics of those companies that reveal a disproportionate sensitivity in stock price movements to new information. The findings suggest that the relationship between a firm’s characteristics, new information, and stock price volatility are statistically significant. It concludes that the elasticities in stock prices to future quarterly earnings announcements can be predicted and used to develop a more reliable and profitable options-based, earnings announcement driven trading strategy.