The Speed of Price Responses to Individual Signals in a Bundle

Abstract

I investigate whether pricing speed varies across major quantitative signals bundled in earnings announcements. Theory predicts that, in the presence of processing frictions, signals with higher net benefits (benefits less processing costs) are priced faster than signals with lower net benefits. I test this prediction by developing a new methodology to measure and compare the speed of intraday price responses to earnings, revenue, and operating cash flow surprises from within the same announcement. Despite earnings news having the highest benefit, I find that revenue news is priced more quickly, consistent with revenue news having lower processing costs and thus higher net benefits. Operating cash flow news is priced the most slowly, consistent with relatively lower net benefits. My findings provide an economic explanation for investors’ differential processing of quantitative signals in a bundle and paint a more complete picture of the price discovery process around disclosure events.