Uncertainty Resolution and Returns Before Earnings Announcements

Summary

This research summary examines why stocks can earn excess returns before earnings announcements. It proposes that investors and analysts resolve some uncertainty ahead of the report, supporting price gains before the announcement itself. The study measures uncertainty using option-implied volatility and realized volatility, then compares pre-announcement abnormal returns across stocks and uncertainty groups. Its proposed portfolio goes long higher-uncertainty stocks and short lower-uncertainty stocks ahead of earnings.

The reported evidence draws on 89,567 U.S. earnings announcements from 1996–2019. Average excess returns were concentrated in the pre-announcement period, and stocks with higher measured uncertainty generally had stronger returns and larger uncertainty declines. The analysis also considers market uncertainty, information gathering, analyst forecasts, and controls for other stock characteristics. These are historical empirical findings, not a guarantee of future returns; the summary gives limited detail on implementation costs and practical trading constraints.

Key ideas

• The study links pre-announcement excess returns to the resolution of earnings-related uncertainty.
• Option-implied volatility and realized volatility serve as uncertainty measures.
• A proposed strategy buys higher-uncertainty stocks and shorts lower-uncertainty stocks before earnings.
• The reported relationship is examined across market conditions and with controls for other stock characteristics.
• Historical sample results do not establish that the strategy will remain profitable after costs.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.