This makes intuitive sense but may not yet be incorporated into option pricing models for this type of set-up. However, this type of anomaly tends to disappear so, as the old-time traders used to say: "Ya snooze, ya lose." Note publication date.
From UCLA's Anderson School of Management's Anderson Review, January 18, 2023:
Price movements can be more extreme
The requirement that publicly traded companies report earnings each quarter creates an elaborate dance between corporations busy doling out earnings guidance and professional analysts tasked with making quarterly earnings estimates.
A key feature of this dance is that corporations are prone to underpromise (under-guide the analysts who follow them, to be precise) so as to be able to overdeliver. The optimal result being, “XYZ Corp. results beat analysts’ expectations.”
Even in the current shaky economic climate, FactSet reports that about 7 in 10 S&P 500 companies reported earnings in the third quarter of 2022 that exceeded the average analyst estimate. The stock price for companies that reported positive earnings surprises rose 2.4% on average in the trading days around the announcement. Negative earnings surprises, meanwhile, yielded a more pronounced stock reaction, with shares post-announcement falling an average of 3.5%.
The Role of the Small Investor
While individual, or retail, investors account for just one-fifth of U.S. stock trading volume, a working paper makes a case that the small investor has a role in how — and how promptly — the market prices in earnings surprises.
Efficient market theory would suggest, of course, that once earnings are announced, a company’s stock would swiftly and correctly reset to the newly implied expectations for the firm. But decades of research have instead shown that stock prices drift after an earnings surprise, for days, weeks or even the entire quarter until the next earnings announcement. Such market inefficiencies, of course, are opportunities for the mostly professional traders who see where the drift is headed.
In a working paper, UCLA Anderson’s Henry L. Friedman and Zitong Zeng, a Ph.D. student, explore the role that nonprofessionals — known as individual, or retail, investors — play in the intensity of market reaction to an earnings surprise, immediately and beyond.
Friedman and Zeng find that the more retail traders are present in a given stock, the stronger the immediate price reaction to an earnings surprise and that the subsequent drift is also more extreme.
To put it charitably, individuals are slower, or less likely, to digest available information on the stock and, Friedman explains in an interview, “are not trading in the direction returns are going.”....
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