Investor reaction to simultaneous news releases: Unemployment vs. earnings

In this paper we examine stock price reaction to simultaneous releases of two prominent types of news: unemployment announcements (captured by the Bureau of Labor Statistics (BLS) Employment Situation Report) and earnings announcements (captured by individual companies earnings releases). Boyd, Hu, and Jagannathan (JF 2005) find that the impact of rising unemployment is significant for stock prices, but the impact may differ during economic expansions and contractions. To better understand the impact of rising unemployment news on stocks of companies that recently also release earnings, we develop a framework to study the effects of these simultaneous news releases (“dual events”).

For such events, we hypothesize that:
H1: Unemployment and earnings surprises are significant on their own.
H2: The stock price impact of unemployment surprises depends on the state of the economy.
H3: Stock prices are always positively related to earnings surprises.

Boyd, Hu, and Jagannathan (JF 2005) find that an announcement of rising unemployment is positive news for S&P 500 index stocks during booms and negative news during recessions. For their time period, we confirm their findings for our sample created using all public stocks – stocks react positively to rising unemployment news during booms, and negatively during recessions. We also find that stocks react positively to higher unexpected earnings in all economic conditions. These results using cumulative returns hold for the entire time period that data are available in the CRSP (1957-2012) database – we also confirm using control factors such as firm size (natural log of total assets) and value (market-to-book ratio), and a dummy for recessions.

We confirm that, during dual events periods, stocks prices are always positively related to earnings surprises; stock prices are positively related to unemployment surprises. we report results using the Fama-French 3-factor model cumulative abnormal returns (CARs). We find that stock prices are significantly positively related to earning surprise always, but that unemployment news is now not significant.

In conclusion, we confirm that unsystematic events (earnings surprise) significantly affect individual stock returns. In an important clarification to the central findings of Boyd, Hu, and Jagannathan (JF 2005) We find that, while unemployment surprises are significant, they are systematic events whose impact is captured within the Fama-French 3-factor and market models. Consequently, when dealing with simultaneous news releases, earnings surprises dominate unemployment surprises for individual stocks.