Purpose: This study investigated the impact of unexpected earnings, interest rates, and liquidity risk on cumulative abnormal returns to explain the underreaction phenomenon. Our sample consists of firms that belong to the information transmission and technology industry stocks from 2010 through 2020.
Design/Method/Approach: We first used unit root and cointegration tests to demonstrate the tests’ levels and differences. We then used the ARDL and error correction models to develop underreaction measures.
Findings: Our empirical results showed a positive but insignificant influence of unexpected earnings and interest rates on cumulative abnormal returns. However, the result showed a negative and significant relationship between liquidity risk and cumulative abnormal returns. Our research result also showed that the ARDL and error correction model explained 43.20% and 44.12% of the variation in the percentage of cumulative abnormal returns, respectively. The models were robust.
Research Limitations: Our study of the underreaction phenomenon was just restricted to the relationships between cumulative abnormal returns and three explanatory variables. Thus, using more than three explanatory variables to explain the underreaction might result in more robustness of the ARDL model.
Practical Implication: our study presents several significant findings and their implications for scholars as well as policymakers which helps the latter make the appropriate decision.
[ FULL TEXT PDF 1-24 ] DOI: 10.30566/ijo-bs/2022.06.90