Chinese Investors' Attention And Unexpected Surplus Effect Of Empirical Research

Accounting earnings are one of the most important and noticeable information for both corporate managements as well as financial market investors, which has introduced a well documented market anomaly known as Standard Unexpected Earning Effect. This effect has been among the most prevalent research topics since1960s and some recent studies in behavioral finance propose that limited investor attention would affect their response to information. This paper compares the response to the earnings announcements released at weekends when investor inattention is more likely, to the response on other weekdays. We base our discussion of the explanation of standard unexpected earning effect on the hypothesis that investor attention would have effects on investment decisions and thus security returns.Adopting the method of event study, this paper tests the standard unexpected earning effect with data from Chinese stock market, an emerging market of much increasing importance in the global financial system, and examines the dynamic price reaction to the earning information under different level of investor attention. Indeed, we find that attention to new information plays a critical role in the response to earnings surprises. When weekends distract investors, the immediate response to earning announcements is less pronounced, and the delayed price reversal is less pronounced as well. On the other hand, higher level of attention during weekdays could interact with investors’ behavioral bias, and thus generate price overreaction to earning surprise.Investors in China are less experienced when compared with investors in developed markets, and as a result more vulnerable to behavioral biases as well as market defects. Based on the existing literature on inattention in finance, results of this paper take the uniqueness of the Chinese market and Chinese investors into consideration and provide an explanation for the findings of unexpected earning effect from the angle of investor attention. This paper contributes to a better understanding of Chinese financial market and its investors while adding to the empirical evidences of behavioral explanation to the market anomaly with data from China.