Keywords

future earnings response coefficient, policy uncertainty

Abstract

We examine whether policy uncertainty triggered by presidential elections pushes the future back by reducing the extent to which current prices reflect information about future earnings. We estimate future earnings response coefficients (FERCs) for the years 1975– 2013, a period that covers ten presidential elections. We find that FERCs are significantly lower (by 11.8%) during presidential election years compared to other years. Additional analyses using pseudo election years, ex-ante polls, contract prices from the Iowa Electronic Political Market, and cross-sectional firm characteristics provide corroborating evidence that the lower FERCs during election years are related to policy uncertainty. We also investigate potential explanations for the lower FERCs during election years.We find that the lower FERCs relate to forecasting difficulty rather than to changes in the discount rate or in the amount of noise trading. Finally, we find that market pricesmove toward future earnings to a greater degree during presidential election years comparedwith other years once the policy uncertainty is resolved. A trading strategy based on this drift yields significant abnormal returns. Overall, we contribute to the literature by providing the first empirical evidence that shocks to policy uncertainty influence the pricing of earnings information.

Original Publication Citation

Drake MS, Mayberry MA, Wilde JH. Pushing the future back: The impact of policy uncertainty on the market pricing of future earnings. J Bus Fin Acc. 2018; 45: 895–927. https://doi.org/10.1111/jbfa.12316

Document Type

Peer-Reviewed Article

Publication Date

2018

Publisher

Journal of Business Finance and Accounting

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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