The Security Market's Reaction to Firms' Quarterly Earnings Evidencing Varying Degrees of Autocorrelation

On a full sample basis, our results are consistent with a security market that significantly underestimates the magnitude of autocorrelation at the 1st and 4th lags where autocorrelation is high but estimates autocorrelation unbiasedly at lags 2 and 3 where autocorrelation is low. Reinforcing the full sample results, when we partition the sample firms into subsamples based upon the magnitude of first lag autocorrelation, we find results consistent with the security market significantly underestimating the level of autocorrelation at the 1st lag for the high autocorrelation subsample of firms, but not for the moderate and low autocorrelation subsamples.