The Market States and the Investors' Reaction to Earnings News

This research aims to explore whether investors have different responses to earnings news in a bull market and a bear market. Based on the theories of Gervais and Odean (2001), Peng and Xiong (2006), Tversky and Kahneman, and Thaler (1985), we anticipate that investors do respond differently. In the bull market, investors have a slower response to bad earning news because investors, having more confidence in the prosperous market, pay less attention to the bad earnings news, and also because in the bull market where the investors have better investment performance, the loss caused by the bad earning news is comparatively small in their mental account. In the bear market, however, the investors have slower responses to good earnings news. The findings of our research confirm our expectations: investors in Taiwan's stock market respond more slowly to bad earnings news in a bull market; they respond more slowly to good earnings news in a bear market.