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Firm-Level Information Ambiguity and the Earnings Announcement Premium

We study the role of firm ambiguity on stock price reaction to earnings announcements. By using the firm’s variance risk premium (VRP) prior to earnings news arrivals as a proxy for firm-level information ambiguity, we provide evidence that this “micro�? form of ambiguity has a significant positive impact on the earnings announcement market reaction. On average, a unit standard deviation increase in the firm’s VRP is associated with 0.33% increase in the firm’s three-day cumulative abnormal returns. We further show that the firm ambiguity is more influential than the market-level ambiguity in affecting the earnings announcement premium. Finally, consistent with predictions of the behavioural and regime-switching models of Barberis et al. (1998) and Veronesi (1999), we find that the news asymmetric effect on stock price returns decreases with firm-level ambiguity.