When Is Bad News Really Bad News?


  • Jennifer Conrad,

  • Bradford Cornell,

  • Wayne R. Landsman

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    • Conrad and Landsman are with the University of North Carolina at Chapel Hill. Cornell is with the University of California, Los Angeles. The authors thank IBES for providing earnings forecasts, Brian Rountree for research assistance, and workshop participants at UCLA and the 2000 European Finance Association meetings, Bill Beaver, René Stultz, an anonymous referee, and Rick Green (editor) for helpful comments. We appreciate funding from both the Center for Finance and Accounting Research at UNC-Chapel Hill and the Bank of America Research Fellowship (Landsman).


We examine whether the price response to bad and good earnings shocks changes as the relative level of the market changes. The study is based on a complete sample of annual earnings announcements during the period 1988 to 1998. The relative level of the market is based on the difference between the current market P/E and the average market P/E over the prior 12 months. We find that the stock price response to negative earnings surprises increases as the relative level of the market rises. Furthermore, the difference between bad news and good news earnings response coefficients rises with the market.