Financial Anomalies and Information Uncertainty

We examine whether rational investor responses to information uncertainty (IU) explain properties of and returns to several financial anomalies (post-earnings announcement drift, value-glamour, and accruals anomalies). Consistent with a rational learning explanation, we find that: (1) higher IU signals have more muted initial market reactions; (2) extreme anomaly portfolios are characterized by securities with higher IU than non-extreme portfolios; (3) within the extreme anomaly portfolios, high IU securities are more prevalent and earn larger abnormal returns than low IU securities; and (4) the abnormal returns to high IU securities converge to the abnormal returns to low IU securities as the post-portfolio formation period lengthens. Further tests show that prior evidence of greater anomaly profitability for higher idiosyncratic volatility securities is largely explained by these securities having greater information uncertainty.