Uncertainty Risk Resolution Before Earnings Announcements

Data show that 72% of the earnings announcement premium is realized before, rather than after, earnings releases. We propose that uncertainty risk resolution before the announcement leads to large pre-announcement returns and test the uncertainty risk resolution hypothesis in the cross section. Compelling empirical evidence supports this hypothesis: an interquartile increase in the firm’s uncertainty level is associated with a 6.3% greater uncertainty reduction and 0.65% higher market-adjusted returns in the 10-day period before earnings announcements. We also provide evidence that there are two distinct channels for uncertainty risk resolution: information acquisition by investors and information supply by analysts and firm management. This paper was accepted by Lukas Schmid, finance. Funding: X. Zhang acknowledges financial support from the National Natural Science Foundation of China [Grant 72350710220]. Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2022.03240 .