Stock return predictability of the cumulative abnormal returns around the earnings announcement date: Evidence from China

We find that cumulative abnormal returns adjusted by size, book‐to‐market, and momentum around the earnings announcement date (DGTW_CAR3 hereafter) significantly and positively predict stock returns in the 6‐month period from May 2005 to October 2020 in the China's A‐shares market. The monthly equally‐weighted DGTW_CAR3 premiums are 0.47% and 0.67% after risk adjustment. Although stock price delay fails to fully account for the DGTW_CAR3 premium, we find that the DGTW_CAR3 premium is more significant for illiquid stocks and during periods with high investor sentiment. This result suggests that market inefficiency explains the DGTW_CAR3 premium. Further analysis shows that, in addition to earnings information, the optimism reflected in the management discussion and analysis section of the annual or half‐year report also contributes to the DGTW_CAR3 premium. This finding implies that DGTW_CAR3 may contain new fundamental information that correlates significantly and positively with future stock performance. Finally, we find that the institutional ownership change of a stock associated with DGTW_CAR3 also significantly and positively predicts the stock's return, suggesting that institutional investors adjust their holdings according to DGTW_CAR3 and consequently influence the demand for the stock in the China's A‐shares market.