Investors’ reaction under uncertainty

Abstract

This study investigates investors’ reaction to good/bad earnings news when faced with market- and industry-wide uncertainties. Our results provide little support for the discount rate explanation that investors’ reaction to good news is dampened during high market volatility. However, the results strongly support the learning hypothesis that earnings news provides value-relevant information for investors during periods of high-market volatility, but that investors cannot learn as much from earnings news under industry-wide uncertainty. These findings also support the conservation hypothesis that investors react more strongly to bad earnings news when faced with market-wide uncertainty.