Investor Limited Attention, Firm Complexity and Post Earnings Announcement Drift

Abstract

Abstract:

This paper studies the impact of firm complexity on investors' information processing and investment, particularly on post earnings announcement drift (PEAD). With A-share listed companies during 2002-2015 as the sample, this paper empirically shows that the complexity level of firms' revenue is significantly correlated with investors' attention and processing of earnings announcement, and thus is significantly correlated with PEAD. Compared with pure players, conglomerates involved in multi-industries and with revenue from diverse sources show greater PEAD. The earning delayed response ratios of conglomerates are at least 10 percent higher than those of pure players. The impact of firm complexity on PEAD would last for at least 2 months. When a pure player grows to be a conglomerate, its PEAD increases significantly. Conglomerates with higher dispersion in segment earnings growth rates also show greater PEAD. This paper provides empirical evidence on the necessity of financial disclosure at industry level for conglomerates.

Key words: investor attention, firm complexity, PEAD, conglomerates

Xiang Cheng, Chen Fengwen. Investor Limited Attention, Firm Complexity and Post Earnings Announcement Drift[J]. , 2019, 31(11): 212-223.

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