Stock Price Informativeness - Do Factors Matter?

Join us as Roger Clarke of Wells Fargo Asset Management (WFAM) Analytic Investors and Steven Thorley of the BYU Marriott School of Business present for this interactive event on February 8.

Abstract

Price informativeness is the financial concept that current prices aggregate information that eventually comes out in the form of realized earnings.  We study the price informativeness of stocks in the U.S. equity market with an extension to common equity factors.  Our results are more precise than previous studies because we use quarterly earnings growth rates, track the date on which they are reported, and analyze the price response using monthly rather than annual returns.  The study includes the largest one thousand stocks from 1975 to 2019, with 167 thousand temporally independent corporate earnings growth rate observations used in capitalization-weighted cross-sectional regressions.  Stock returns are informed by earnings up to 15 months before they are reported, with a near monotonic increase in coefficient magnitude and statistical significance for earlier months.  As expected, the largest return sensitivity is to the concurrent earnings report, and past reports have little impact on current returns.  The cumulative coefficient on earnings growth rates explains an impressive amount of the cross-sectional variation in stock returns as measured by regression R-squared, and the resulting price informativeness statistic that excludes concurrent earnings.  Stocks with higher profitability factor exposure are much more sensitive than average to realized earnings growth rates.  Value and momentum stocks are slightly more sensitive than average, while small size or low beta stocks are slightly less sensitive.