Cash flow duration and market reactions to earnings announcements

Abstract

This study examines how a stock security’s cash flow duration impacts stock price reactions at earnings announcements. We find that stock price reactions are positively associated with cash flow duration, especially when earnings surprises are negative. Our results imply that long duration creates a leverage effect that magnifies the price reaction around earnings announcements. We further show that the greater stock price reaction for firms with longer cash flow duration could be caused by less accurate analyst forecasts and short-sales constraints. Finally, we find that the effect of cash flow duration generally increases over time, being more notable during financial crisis and less notable when investor sentiment is high.