Document Type

Honors Project - Open Access

Abstract

This paper examines trading reactions to quarterly earnings reports and the impact of recent monetary policy announcements by the Federal Open Market Committee (FOMC). It argues that the market, as a product of rational and irrational investor behavior, interprets firms’ financial performance within a broader macroeconomic context, affirming the causal channels found in similar studies. This study differs from prior research by looking at the recent, not simultaneous, monetary policy announcement for each earnings announcement in order to understand if the two types of information remain complementary. By conducting an event study model, this study confirms that the interaction of firm-level and market-level information creates greater market efficiency in price discovery, shown through a significant immediate reaction and insignificant post-earnings announcement drift (PEAD). However, this study reveals a decay in this efficiency and the level of complementary interaction as the two announcements are farther separated, as well as evidence of irrational behavior.

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