Clever tests to discriminate between alternative explanations. LaPorta, Lakonishok, Shleifer, and Vishny (â€œGood News for Value Stocks,â€...

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Clever tests to discriminate between alternative explanations.LaPorta, Lakonishok, Shleifer, and Vishny (â€œGood News for ValueStocks,â€ 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 diï¬€erence is statisticallysigniï¬cant.

(i) High returns around earnings announcements are more likely tooccur if the earnings surprise is _______. (Fill in the blank withâ€œpositiveâ€ or â€œnegativeâ€.)

(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(eï¬ƒcient markets) view of the book-to-market eï¬€ect, and explainyour logic.

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i High returns around earnings announcements are more likely to occur if the earnings surprise is Fill in the blank with positive or negative The answer is positive With a larger than See Answer

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Clever tests to discriminate between alternative explanations. LaPorta, Lakonishok, Shleifer, and Vishny (â€œGood News for Value Stocks,â€...