The Earnings Announcement Premium as Uncertainty Aversion : Theory and Evidence

We argue the earnings announcement premium is a measure of firm-specific uncertainty aversion. Our stylized model shows earnings announcements, as pure news events, are priced only if investors are uncertainty averse; further, the earnings announcement return is negatively correlated to future investment only if there is time-varying uncertainty. Consistent with the model, we empirically show that when the earnings announcement premium is higher, investment falls, cash levels and savings increase. Finally, the earnings announcement return is higher for firms with greater political risk, small firms, complex firms, and firms listed on NASDAQ or AMEX, inconsistent with time-separable expected utility