Driven to Distraction: Extraneous Events and Underreaction to Earnings News





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    • Hirshleifer and Teoh are at Paul Merage School of Business, University of California, Irvine and Lim is at Kellstadt Graduate School of Business, DePaul University, Department of Finance, Chicago, Illinois. We thank an anonymous referee; Nick Barberis; Nerissa Brown; Werner DeBondt; Stefano DellaVigna (NBER conference discussant); Laura Field; Wayne Guay (FRA conference discussant); Campbell Harvey (the editor); Christo Karuna; Erik Lie; Yvonne Lu; Ray Pfeiffer (FARS conference discussant); Mort Pincus; Charles Shi; and seminar participants at the Merage School of Business at UC Irvine, DePaul University, the Anderson Graduate School of Management at UCLA, the Sauder School of Business at University of British Columbia, the University of Kansas, and conference participants at the 10th Biennial Behavioral Decision Research in Management Conference at Santa Monica, California, the NBER Behavioral Finance November 2006 Meeting at Cambridge, Massachusetts, the Financial Research Association 2006 Conference at Las Vegas, Nevada, the Financial Accounting and Reporting Section 2007 Conference at San Antonio, Texas, and the Chicago Quantitative Alliance conference at Chicago for very helpful comments.


Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The investor distraction hypothesis holds that extraneous news inhibits market reactions to relevant news. We find that the immediate price and volume reaction to a firm's earnings surprise is much weaker, and post-announcement drift much stronger, when a greater number of same-day earnings announcements are made by other firms. We evaluate the economic importance of distraction effects through a trading strategy, which yields substantial alphas. Industry-unrelated news and large earnings surprises have a stronger distracting effect.