The anticipation and interpretation of UK company announcements: The incentives to acquire information

Abstract

The objective of this thesis is to explain the behaviour of stock returns around the disclosure of different types of information release by UK companies. Previous literature has documented the existence of both market anticipation and the lagged impounding of value relevant information. The main objective of this research is, therefore, to identify the conditions under which investors choose to be informed in anticipation of and in response to, a corporate disclosure. More specifically, we explain the behaviour of stock returns in terms of the costs and benefits which investors must consider when deciding whether to acquire and interpret information. The results indicate that market anticipation is an increasing function of firm size, the number of years a firm has been trading and the volatility of prior stock returns. However, increased voluntary disclosure by firms would appear to reduce the ability of investors to and anticipate and interpret information. The volatility of stock returns, prior to the disclosure, is nevertheless the main driving force behind the explanation of post-announcement drift. There are also indications that investors' initial reactions to both earnings and non-earnings news are not based on informed judgements, and that bad news is generally associated with greater uncertainty than good news. Bad news would appear to be more difficult to anticipate and interpret, relative to good news. On further examination, however, investor anticipation is shown to be largely based on information as opposed to uninformed trading.