attention: the price is fixed and not negotiable, once you accept


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attention: the price is fixed and not negotiable, once you accept my question i won’t change the price. a tip might be given to you if your work exceeded my exceptions. my question: i want a 2 pages summary for the following article (attached): how naive is the stock market’s use of earnings information? by ray ball and eli bartov the summary should contain the following: 1- motivation: like previous studies that motivated the authors. 2-research question? and hypothesis? 3- methodology: like sample used and model used 4- results and analysis 5-concolsuion contains: results, implications, limitations, and prospects in the future. download.pdf How Naive Is the Stock Market’s Use of Earnings Information? by Ray Ball* William E. Simon Graduate School of Business Administration University of Rochester Rochester, NY 14627 Tel: 716-2756972 e-mail: ball@mail.ssb.rochester.edu and Eli Bartov Leonard N. Stern School of Business New York University 40 West 4th St., Suite 423 New York, NY 10012 Tel: 212-9980016 e-mail: ebartov @ db.stern.nyu.edu August 1995 Comments Welcome * We are indebted to Vic Bernard and Jake Thomas for providing their data and to Larry Brown, Andrew Christie, S.P. Kothari, Joshua Ronen, Terry Shevlin, Jerold Zimmerman and two anonymous referees for helpful comments. Financial support was received from the Bradley Policy Research Center at the Simon School, University of Rochester and the John M. Olin Foundation. How Naive Is the Stock Market’s Use of Earnings Information? ABSTRACT Rendleman, Jones and Latané (1987) and Bernard and Thomas (1990) report evidence supporting their hypothesis that investors use a "naive" seasonal random walk model, at least in part, to form expectations of quarterly earnings. Unfortunately, they do not report (or imply) evidence of the extent to which the market does seem aware of the deficiencies of such a model. Using the Bernard and Thomas (1990) data we show that the market acts as if it: (1) does not use a seasonal random walk model; (2) does incorporate past earnings changes in forming expectations; (3) does use the correct signs in exploiting serial correlation in seasonally-differenced quarterly earnings; but (4) underestimates the magnitude of the serial correlation by an average of approximately fifty percent. This evidence remains inconsistent with the theory of efficient markets. We discuss the "partially naive expectation model" and behavioral information processing hypotheses, and find them wanting as explanations also. How Naive Is the Stock Market’s Use of Earnings Information? 1. Introduction Rendleman, Jones and Latané (1987) hypothesize that investors are unaware of the serial correlation in quarterly earnings changes, and thus do not exploit all the information in earnings. A prediction which distinguishes this hypothesis from market efficiency is that abnormal returns when future quarters’ earnings are announced are a function of current earnings, with signs that mimic those of the unexploited serial correlation. Bernard and Thomas (1990) present robust evidence, subsequently corroborated in several studies, consistent with this prediction. They are careful to conclude (1990, p.338) that “while prices may partially reflect [the information in past earnings concerning future earnings], they evidently do not reflect all available information,” though they offer no evidence on the extent (if any) to which the market does seem aware of the serial correlation. Using their data, we show that returns at earnings announcements are consistent with investors knowing both the existence and the sign pattern of serial correlation in seasonally-differenced quarterly earnings, but under-estimating its magnitude by approximately fifty percent. Showing market awareness of serial correlation does not contradict the empirical anomaly reported by Rendleman, Jones and Latané (1987) and Bernard and Thomas (1990), but it does hel

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