Clever tests to discriminate between alternative explanations.LaPorta, Lakonishok, Shleifer, and Vishny (“Good News for ValueStocks,†Journal of Finance, June 1997) study the returns on stockson the few days surrounding their quarterly earnings announcements(relative to various expected return benchmarks). They ï¬nd that onaverage, high-B/M stocks earn 0.9% around an earnings announcement.In contrast, low-B/M stocks earn an average of -0.1% around anearnings announcement. The difference is statisticallysigniï¬cant.
(i) High returns around earnings announcements are more likely tooccur if the earnings surprise is _______. (Fill in the blank with“positive†or “negativeâ€.)
(ii) Discuss whether the return pattern found by LaPorta et al.(1997) around earnings announcements is more consistent with theirrational expectations (behavioral) view, or the risk factor(efficient markets) view of the book-to-market effect, and explainyour logic.
