Shifting attention between macro and firm-specific information around earnings announcements

Abstract: Theoretical models predict that investors with limited capacity to process information will shift attention to macro information when macro uncertainty is high, which may lead to neglect of firm-specific information such as earnings announcements. I predict that stock prices will therefore initially underreact to earnings in times of high uncertainty, and display a delayed reaction thereafter. I also predict that attention allocation will affect trading volume. My tests reject the predictions for returns, but show that trading volume is lower for firms that report earnings in times of high uncertainty. Returns are also consistent with the hypotheses in the period before the collapse of Lehman Brothers.