The EAD puzzle in the value premium

Firm-specific news content has multiple times greater impact on stock returns during earnings announcements (EA). Using Thomson Reuters News Analytics, we show that glamour stocks are almost twice as respon- sive to this news release than value stocks which only exhibit a weak initial response. The EA-news effect is not reversed over the rest of the quarter, suggesting that the impact of news is permanent and informative. Our findings are consistent with an increase in idiosyncratic risk post-EA for value stocks due to slower information assimilation. If investors realize on EA that value stocks news convey a disappointing amount of informa- tion (in the sense that implications for future earnings and returns are less obvious than for growth stocks), then those investors will command a premium for bearing post-EA idiosyncratic risk. We further find that low reaction to EA-news is priced: stocks with the lowest sensitivity to EA-news earn a significant 19.80% annualized return and exhibit much greater idiosyncratic risk levels post-EA.