Is the mispricing of bank earnings related to financial regulation uncertainty?

Tuan Q Ho, Edward Lee, Lobo Gerald, Zhenmei Zhu*

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

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Abstract

We examine the impact of financial regulation uncertainty on the mispricing of earnings in the banking sector. To the extent that the uncertainty generated by the regulatory process can trigger opinion divergence (rational attention), we expect it to delay (accelerate) share price responses to banks’ earnings news. Consistent with the dominance of the opinion divergence effect, we show that such uncertainty is positively associated with banks’ post-earnings announcement drift and this effect is stronger among banks that are more sensitive to financial regulatory uncertainty. Further analyses through analyst forecast error, analyst forecast dispersion, and idiosyncratic return volatility provide corroborative evidence of opinion divergence. Our findings remain consistent after a series of robustness tests. Although financial regulations seek to provide capital market stability, our evidence implies that regulatory uncertainty can invoke negative externalities on market information efficiency.
Original languageEnglish
Article number107180
Number of pages20
JournalJournal of Accounting and Public Policy
Volume44
Early online date20 Apr 2024
DOIs
Publication statusE-pub ahead of print - 20 Apr 2024

Bibliographical note

Publisher Copyright:
© 2024 Elsevier Inc.

Structured keywords

  • AF Financial Reporting

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