Sell on the News: Differences of Opinion and Returns around Earnings Announcements

We present strong evidence that high differences of opinion stocks earn lower returns around earnings announcements. The evidence is similar across six different proxies for differences of opinion (earnings volatility, return volatility, dispersion of analysts’ earnings forecasts, number of analysts, firm age, and share turnover). The three-day hedge returns (returns on low minus high differences of opinion stocks) around earnings announcements are equivalent to annualized returns of 14% to 60% depending upon the proxy used. The results are even stronger for firms that are more difficult to short. Our findings are consistent with Miller’s (1977) hypothesis that stock prices contain an optimistic bias and that resolution of uncertainty results in downward price corrections. Our conclusions are not affected when we control for size, book-to-market, post-earningsannouncement-drift, leverage, price momentum and price reversals. Our conclusions are also not affected when we control for the return premium around earnings announcements.