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Ambiguity Aversion, Company Size and the Pricing of Earnings Forecasts
Author(s) -
Antoniou Constantinos,
Galariotis Emilios C.,
Read Daniel
Publication year - 2014
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2012.00651.x
Subject(s) - ambiguity , earnings , ambiguity aversion , pessimism , economics , financial economics , stock (firearms) , econometrics , stock price , quarter (canadian coin) , accounting , computer science , epistemology , engineering , programming language , history , paleontology , archaeology , series (stratigraphy) , biology , mechanical engineering , philosophy
Several authors have reported an unconditional size effect in returns around earnings announcements. In this study we show how this finding can be understood as resulting from ambiguity aversion. We hypothesise that analyst forecasts for smaller companies are relatively more ambiguous; hence they are priced pessimistically by ambiguity‐averse investors. As the quarter comes to a close and ambiguity gradually subsides, the stock prices of smaller companies rise to correct this pessimism, creating the size effect. Our results support these hypotheses .