Recurring Firm Events and Predictable Returns: The Within-Firm Time-Series

Samuel M. Hartzmark

David H. Solomon*

Prepared for the Annual Review of Financial Economics

This Draft: October 12th, 2017

Abstract: We review the literature on recurring firm events and predictable returns. Many

common firm events recur on a predictable basis, such as earnings and dividends, among others.

These events tend to be associated with large positive returns in the period when those events are

predicted to occur (without conditioning on the outcome or existence of the event itself). These

returns occur mainly on the long side of the portfolio, are statistically and economically large

when value weighted, and replicate internationally. It is difficult to explain the patterns with a

unified risk theory. Some of the underlying causes seem to be related to idiosyncratic risk,

predictable attention, probability mistakes and demand for corporate distributions.

Hartzmark is at the University of Chicago Booth School of Business. *Solomon is at Boston College Carrol School
of management. Contact at samuel.hartzmark@chicagobooth.edu and david.solomon@bc.edu, respectively. All
remaining errors are our own.

Electronic copy available at: https://ssrn.com/abstract=3053015

 When asset-pricing studies the cross-section of stock returns, the typical conception is not

of the cross-section of firms, but of the cross-section of firm traits. For instance, the

value/growth dimension is considered as a driver of returns, either as a characteristic or a

covariance, depending on ones view. Individual firms are assigned into different portfolios

based on their level of the variable at that time, switching between different sides of the portfolio

as their traits change. When the time-series is studied, it is then either the time series of the

overall market, or the time-series of the resulting trait-sorted portfolios.

If instead one begins by thinking of the cross-section of firms themselves, an intuitive

extension is the within-firm time-series the changes in a firm over time. The standard cross-

section is thus a variety of traits, some very slow-moving or essentially fixed (e.g. industry),

others moving relatively quickly (e.g. past 12 month stock returns), and some recurring on a

periodic basis. It is the last category that this paper is about. We survey the literature on return

predictability surrounding firm events which recur on a predictable basis.

To begin with the most important result recurring firm events are generally associated

with abnormally high returns. This encompasses most major events common to firms, namely

earnings (Frazzini and Lamont (2006), Barber, De George, Lehavy and Trueman (2013)),

dividends (Hartzmark and Solomon (2013)), stock splits, stock dividends, special dividends,

increases in dividends (Bessembinder and Zhang (2014)), and seasonal changes in earnings

(Chang, Hartzmark, Solomon and Soltes (2016)). A similar pattern is found when conditioning

on recurring annual patterns in firm returns (Heston and Sadka 2008, 2010). Each of these events

is simple to predict with a high degree of accuracy, even when using quite stale data. Unlike

many anomalies, most of the returns occur on the long side of the portfolio, and abnormal returns

are evident when using value-weighted portfolios. Furthermore, many of the patterns have been

Electronic copy available at: https://ssrn.com/abstract=3053015

replicated in international data. As a stylized fact about asset returns, the high returns around

recurring events are puzzling, but quite robust.

Recurring firm events are particularly interesting in terms of whether patterns in returns

are due to risk or mispricing. Exposure to risk is generally thought to arise from the economic

properties of firms and their business operations. Many of these sources map to slow-moving

firm attributes that cannot be directly linked to recurring events, as most firms do not radically

change their business plans on a frequent and recurring basis. This does not rule out all risk-

based explanations, but it does sharply limit the set of risk-based alternatives. For risk to explain

the patterns we describe, firms must become risky only in certain periods of the year, either due

to the events themselves, or due to something that occurs on the same repeated schedule.

The patterns in returns are particularly unlikely to be explained by exposure to standard

factors such as size, value or momentum. The trading strategy to take advantage of quarterly

recurring firm events is to buy firms in the periods of the year when the event is predicted to

occur (e.g. the 4 months predicted to have a dividend payment) and short the same set of firms in

other months (e.g. the 8 months of the year without a predicted dividend payment). Thus each

firm is in the long portfolio for 4 months of the year, and in the short portfolio at half the weight

(since there are roughly twice as many firms in the short portfolio) for 8 months of the year.

As a result, over the course of the year, the average weight on a firm is zero. Because of

this, any risk loading that is a fixed property of the firm is canceled out. Risk loadings that vary

over time for the firm may still explain the returns, but this requires that the firm has more risk

exposure in months with the predicted event. Because the characteristics underlying many

standard factors are slow moving, rather than recurring in 4 months of the year, in practice any of

3
the standard models (e.g. 3-factor, momentum, liquidity, 5-factor) yield similar estimates of

abnormal returns.

Since the patterns in returns are not driven by standard risk factors, what is their cause?

While each event offers a distinct pattern, there are common themes across them. The events can

be classified between those involving predictable releases of information and those involving

predictable corporate distributions (with some events, such as dividends, involving both).

Information releases include earnings announcements, dividend announcements, earnings

seasonality, and predictable increase in dividends. Predictable corporate distributions cover

dividend ex-days, stock splits, and stock dividends.

Risk-based explanations seem more plausible for information-based events, where the

announcement itself may expose the firm to greater risk. This has been argued in the case of

earnings announcements, both in terms of greater exposure to a systematic earnings

announcement factor in Savor and Wilson (2016), and in terms of greater idiosyncratic risk in

Barber et al. (2013). Much of the earnings announcement premium occurs in the days before the

announcement, which is not a prediction from the Savor and Wilson (2016) model. Some

additional friction is needed to transfer risk to the days before the announcement, such as dealers

facing announcement-related inventory risk (So and Wang (2014), Barth and So (2014) and

Johnson and So (2017a)).

Other events and aspects of the returns surrounding earnings announcements are difficult

to explain with these theories and suggest some of the returns are caused by predictable

mispricing. Frazzini and Lamont (2006) show that the earnings announcement premium is larger

for firms that have greater predictable increases in announcement volume, consistent with

4
mispricing due to time-varying attention. This could occur in settings such as Miller (1977),

where disagreement and short sales constraints result in overpricing because the most optimistic

investors hold the share. More investor attention increases the number of potential investors in

the right tail of beliefs, and if this is combined with a fixed supply of a stock it will result in

greater optimism among the investors who end up holding the stock.

The announcements themselves often include news that is predictable, such as seasonal

shifts in earnings or predictable increases in dividends. Price reactions to the predictable

component suggest behavioral explanations whereby investors do not fully incorporate the

predictable component of disclosures. Chang et al. (2016) argue that the abnormal returns in

periods of seasonally high earnings are not related to idiosyncratic risk, exposure to a systematic

earnings factor, or increases in attention, but rather investors being predictably surprised due to

biased expectations.

Risk based explanations are unlikely to explain the second class of events, namely the

high returns around corporate distributions themselves. The reason is that all of the news and

uncertainty related to the distribution is resolved well before the distribution occurs. In the case

of dividends, once the firm has announced a dividend (typically weeks before the distribution), it

is legally obligated to pay it. Nonetheless, there are high returns on the stocks ex-dividend day

(Elton and Gruber (1970)), and on the day of stock splits and stock dividends (Grinblatt, Masulis

and Titman (1984)). While taxes could explain the dividend ex-day result (as Elton and Gruber

(1970) argue), they do not explain the stock split and stock dividend results.

Even more tellingly, in the case of dividends, there are high returns in the interim period

after the dividend is announced but before the ex-day, and then reversals after the ex-day

5
(Hartzmark and Solomon (2013)). These patterns are most consistent with investors having a

demand for dividends and purchasing shares in the lead-up to payment. This could occur because

mutual funds are trading in and out of dividend-paying stocks catering to increase their dividend

yield (Harris, Hartzmark and Solomon (2015)), or because some investors suffer from the free

dividend fallacy and view the dividends as not having a tradeoff in terms of price (Hartzmark

and Solomon (2017)). 1

Overall, these findings present a promising avenue for future research. That is, the base

pattern in returns is a common stylized fact predictably recurring firm events tend to be

accompanied by high returns. Occams razor suggests that a common pattern across many

instances ought to have a common single cause. Notwithstanding this, current research has not

successfully identified an overall cause, and instead has examined a range of different

explanations for each of the individual events. Partly, this stems from the fact that researchers to

date do not appeared to have considered recurring firm events as a class of phenomena, and

hence have not thoroughly examined them as a group. It is our hope that this article helps to

encourage exactly this kind of thinking and research.

2. Types of Recurring Firm Events

There are a limited number of events that are common to a large subset of publicly listed

firm, easily predictable because they occur at regular intervals and are identifiable in standard

datasets, and important enough to receive attention from investors. To begin, we describe the

events in question, and the literature which studies their returns.

1
Mispricing theories tend to require additional background assumptions about the nature of the market. Price
pressure implies limitations in the ability of other investors to supply liquidity. This could occur due to short sales
constraints or limited amounts of arbitrage capital. Theories of biased investor reactions require that other investors
are unaware of the mistake, or unable to trade in sufficient quantities to correct it.

6
Earnings announcements

One event universal to all public firms (by law) is the earnings announcement.

Companies are required to release information on earnings from the previous quarter and this

garners significant attention. In addition, companies tend to report earnings in the same month of

each year (Frazzini and Lamont (2006)). The evidence of high returns around earnings

announcements dates back to Beaver (1968), and the patterns in daily returns have also been

studied in Chari, Jagannathan and Ofer (1988), Ball and Kothari (1991), and Cohen, Dey, Lys

and Sunder (2007), among others.

Early papers tended to condition on the timing of the actual earnings announcement,

which investors might not know ahead of time. Moreover, the timing of the announcement can

convey information, as late announcers tend to release bad news (e.g. Penman (1984), Chari et

al. (1988) and Cohen et al. (2007)). Thus, the conservative approach is to not condition on the

announcement, but instead predict the timing of the announcement based only on past

information. 2 The simplest method is to predict an earnings month based on an announcement

occurring twelve months prior (Frazzini and Lamont (2006)). The returns to predicted earnings

announcement months have been studied in Frazzini and Lamont (2006), Barber et al. (2013),

and Savor and Wilson (2016). The monthly calendar-time portfolio strategy buys firms in

months with a predicted earnings announcement, shorting firms in all other months.

2
In the modern period the announcement date is typically known ahead of time. Boulland and Dessaint (2017)
show, in the 2007 to 2012 period, earnings tend to be pre-announced with a median notice period of 14 days.
Johnson and So (2017b) document that during this era there are firms that publish expected announcement date with
a high degree of accuracy.

7
Earnings Seasonality

Within the set of earnings announcements, many firms exhibit predictable patterns in the

level of their earnings over the year (e.g. firms selling ice cream generally announce higher

earnings in the summer) simply due to their business. Firms tend to have higher returns in

months when they are predicted to announce earnings that correspond to historically large

quarters. Keynes (1936) provides anecdotal evidence of such an effect while Salamon and Stober

(1994) document high returns to these announcements conditioning on the ex-post surprise.

Chang et al. (2016) show these high returns are tradable as they are evident using stale data to

predict seasonal patterns. The trading strategy buys firms in earnings months when they

historically announced larger earnings, and shorts firms in earnings months when they

historically announced smaller earnings.

Dividends

Another important recurring event common to many firms is the issuance of dividends.

Like earnings, firms usually issue dividends at the same time each year. Unlike earnings, firms

are not obligated to pay dividends on a regular basis, or indeed at all. But firms that pay

dividends are reluctant to omit them (John and Williams (1985), Bernheim (1991), and Nissim

and Ziv (2001)).

Dividend issuance includes a sequence of distinct events and sub-periods. The dividend is

announced and becomes a legal obligation of the firm. The dividend is paid to shareholders who

hold the share on the record day. Because trades are settled later (three days at present), the

important date for trading purposes is the ex-dividend day: the first day that an investor

purchasing the share will not receive the dividend. The period after the announcement and before

8
the ex-day (typically ten days) is referred to by Hartzmark and Solomon (2013) as the interim

period. Finally, the date that funds are transferred is called the payment date.

The returns in these periods have been studied in a variety of contexts, and each is

associated with positive returns. The most studied is the ex-day. As early as Campbell and

Baranek (1955), it has been known that the price on the ex-day typically drops by less than the

value of the dividend, generating positive returns. Dividend announcements are associated with

abnormally high returns, as shown by Kalay and Loewenstein (1985), Eades, Hess and Kim

(1985) and Hartzmark and Solomon (2013). Like earnings, it is important to not condition on the

actual announcement date which is not known beforehand, as firms sometimes omit dividends or

delay the announcement if news is bad (Kalay and Loewenstein (1986)). Eades, Hess and Kim

(1985) and Hartzmark and Solomon (2013) show that predicted dividend announcement dates

also have positive abnormal returns. Meanwhile, Lakonishok and Vermaelen (1986) and

Hartzmark and Solomon (2013) document both that interim period returns are positive and that

returns revert after dividend issuance. Finally, Berkman and Koch (2017) document high returns

on the dividend pay date. At the monthly level, a long literature explores the relation between

realized dividends and stock returns. 3

In the current context, it is the effect of predicted dividends on returns that is most

relevant. Hartzmark and Solomon (2013) document a dividend month premium for months with

a predicted dividend ex-day, while Bessembinder and Zhang (2014) show a similar result for

3
Litzenberger and Ramaswamy (1979, 1980, 1982) document that expected returns are positively related to
dividend yield, while Black and Scholes (1974) and Miller and Scholes (1982) argue there is no relation. Kalay and
Michaely (2000) reconcile these results by showing that the returns are primarily a time-series effect in other
words, if you assign a dividend yield only to the month of payment, you observe a relation, but if you assign it to the
whole year, you do not, consistent with the dividend month premium finding.

9
special dividends. The trading strategy is to buy dividend-paying firms in months when they are

predicted to have a dividend ex-date, and short dividend-paying firms in other months.

Stock Splits and Stock Dividends

Stock splits and stock dividends are both distributions of shares to existing shareholders

that differ only in their split factor and labeling. In theory, these events ought to change the share

price and the number of shares outstanding by offsetting amounts, leaving firm value unchanged.

Nonetheless, announcements of stock splits and stock dividends are associated with positive

returns, as documented in Fama, Fisher, Jensen and Roll (1969), Grinblatt, Masulis and Titman

(1984) and McNichols and Dravid (1990). This has been linked to the signaling value of stock

splits and stock dividends. In addition to announcements, Grinblatt, Masulis and Titman (1984)

document positive return on stock split ex-days. Like with dividends, ex-day returns are tradable,

whereas conditioning on the announcement is not.

At the monthly level, Bessembinder and Zhang (2014) document positive returns in

months predicted to have a stock split or a stock dividend, consistent with these events recurring

annually, though at a lower frequency than traditional dividends. The trading strategy buys firms

in months when they are predicted to have a stock split or stock dividend ex-day and short firms

who had a stock split in all other months. 4

Increases in Dividends

Not only are firms reluctant to omit dividends, but they are also reluctant to cut

dividends. Partly for this reason, increases in dividends are generally considered good news, as
4
This differs slightly from the methodology in Bessembinder and Zhang (2014), who short all other firms (rather
than shorting the same firms with stock splits in other months). The current version differences out any general
properties of firms that have stock splits, leaving only the within-firm variation. We also do the same differencing
out in the case of dividend increases, thereby removing the general dividend month premium.

10
documented in Lie (2000) and Grullon, Michaely and Swaminathan (2002). High returns are

evident without conditioning on the announcement itself, but based on the prediction of a

dividend increase (Bessembinder and Zhang (2014)). The trading strategy is to buy firms that

increased their dividend 12 months ago by at least 5%, and short all other dividend-paying firms

with a predicted dividend this month.

Other Firm Events and Return Seasonality

Finally, firms have many types of events that are important to their business and grab

attention, but are not common or uniformly reported across a wide set of firms. For example,

Apple generally announces their new iPhones in September of each year, a predictable

significant release of public information for that firm. This is a unique event to Apple that is not

typical of other firms and not easy to quantify in many standard datasets. If important firm events

are generally associated with predictable patterns in returns, then sorting on past returns will

capture a plethora of important idiosyncratic events.

Consistent with this, Heston and Sadka (2008, 2010) show that when stocks are sorted on

the average historical returns in a calendar month, this strongly predicts future returns in that

month. In other words, if a stock had high returns in the past five Januaries, it will tend to have

high returns in the current January. While this is not direct evidence of an actual recurring

corporate event, such events are consistent with the pattern. Another interpretation would that the

returns are themselves a predictable recurring event. The trading strategy buys the top decile of

firms based on average returns in the month over the last five years and shorts the bottom decile.

3. Basic Asset Pricing Properties of Recurring Events

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 We argue that these patterns have enough in common to justify studying them as a

unified class. The patterns described in this paper are noteworthy in that these events represent

the most obvious and important recurring firm events to be examined. Earnings announcements,

dividends and other associated corporate distributions are not minor or difficult to find, these are

the most likely candidates. Nonetheless, to bolster our claim of the importance of jointly

studying these events, we begin by establishing common asset pricing properties of the events,

using replicated versions of each of the anomalies including the most recent data.

The events described are easy to predict using simple rules based on past information

which can be utilized to form portfolios. 5 We define a predicted earnings announcement as a

firm announced earnings that month in the prior year with a predicted special dividend, stock

dividend or increase in dividends defined analogously. A predicted dividend is defined as a

quarterly dividend 3, 6, 9, or 12 months ago. 6 We call a firms earnings announcement high

(low) seasonal if over the prior five years, that quarters earnings were relatively large (small)

relative to other quarters. 7 To examine past returns, firms are ranked based on their average

return in a month over the prior five years.

Table 1 presents value-weighted abnormal returns for portfolios sorted on each of these

predicted attributes. It shows that the predicted events in general:

Are associated with positive and highly significant returns

5
These rules are generally overly simple and use data that is overly stale to demonstrate that no look ahead bias is
induced. Returns are generally stronger using more complex predictors.
6
With similar rules for semi-annual and annual dividends, see Hartzmark and Solomon (2013).
7
As in Chang et al. (2016), we begin with all firms that have an earnings announcement in a given month. We
construct the Earnrank variable by taking the companys earnings-per-share (adjusted for splits) for a five year
period, and rank all 20 announcements from highest to lowest. We then compute the average rank across all five
announcements from the same fiscal quarter as the current announcement, which gives Earnrank. Stocks are sorted
on this measure and this is used to predict the seasonal level of earnings in 12 months time (so all earnings
information is between 1 and 6 years old at the time of portfolio formation).

12
 Have abnormal returns when value-weighted

Have most of their abnormal returns in the long leg

Show similar returns across a wide range of factor models

Show abnormal returns conditioning on extremely stale data, lagged 5 years or more

Table 1 examines the alphas under six different models and the simple raw return. The CAPM,

the three-factor model (Fama and French (1993)), the four-factor model including momentum

(Carhart 1997), the five-factor model (Fama and French 2016), the four-factor model with the

Pastor and Stambaugh Liquidity measure (Pastor and Stambaugh 2003), and the four-factor

model with the UmO misvaluation factor (Hirsheifer and Jiang 2010). Alphas from that

regression (in percentage points) are reported.

Panel A presents the long-short strategies. Abnormal returns range from 27 to 112 basis

points per month. t-statistics are generally high, ranging from 2.26 to 7.35 ignoring the stock

dividend column. A striking aspect of these alphas is they are not materially changed by the

choice of factor model - the raw return in the first row paints a similar picture to the observations

below it. This is in large part due to firms in these strategies switching between the long and

short leg throughout the course of the year as it cycles through its own within firm time-series.

In the final row of Panel A, we examine alphas based on portfolios where the sorting

variable is lagged 5 years further into the past. Thus the most recent data used occurred at least

five years before portfolio formation. We report results for the five-factor model, but each of the

models yield similar results. Again, we observe positive and significant alphas for nearly all the

events. While the magnitudes are slightly smaller, this reflects the fact that the event

13
predictability weakens as time evolves, underscoring that the portfolios sorts capture return

reactions to the events. These events are predictable, persistent, tradable characteristics of firms.

Stock dividends generally show a weaker pattern than the other events. 8 This is mainly

because they are rarer, with a median of 8 per month, and not as persistent at the annual

frequency. The simple rule for standard dividends correctly predicts dividends with 88%

accuracy, while the stock dividend rule predicts at only 29%. Bessembinder and Zhang (2014)

also examine returns around stock splits though the simple rule only predicts with 4.5%

accuracy. Since they are not really annually recurring, we omit them from our analysis. 9 Even

though stock dividends do not lend themselves to calendar time strategies, we include them to

get as wide a range of firm events as possible, and to ensure we are not cherry-picking events.

Panel B examines the long leg of each strategy. Abnormal returns range from 10 to 89

basis points per months, with t-statistics from 3.07 to 7.07, again ignoring the stock dividend

column. None of the patterns are greatly influenced by the risk model, other than when

profitability is included with the long only dividend strategy. 10 While many anomalies are

concentrated in the short leg where trading costs are higher (Stambaugh, Yu and Yuan (2012)),

this is not the case for recurring firm events.

Many have critiqued the anomaly literature for data-mining and finding small effects (e.g.

Harvey, Liu and Zhu 2016). The alphas here are value weighted, so they are not concentrated in

small economically insignificant firms (e.g. Hou, Xue and Zhang 2017). Further, the t-statistics

8
Partly, they are sensitive to value-weighting, as the equal-weighted difference portfolio shows large and significant
returns (5 factor-alphas of 58 basis points per month with a t-statistic of 3.43, and with a lag of 5 years a 5 factor
alpha of 50 basis points with a t-statistic of 2.64).
9
Bessembinder and Zhang (2014) show that simple rules can be added to predict which year an event will occur in,
greatly enhancing the returns to the strategy.
10
Profitability is heavily correlated with the long-only dividend strategy, but as Panel A shows, this does not
account for the dividend month premium, but rather the general level of returns of dividend paying stocks.

14
are generally well above the thresholds suggested to accommodate data-mining issues. These

portfolios clearly lack a look-ahead bias as they can be formed using data from five years prior

(in some cases as stale as twenty years) and attain significant alphas. Concerns about cherry

picking events should be mitigated by the fact that these represent the most obvious recurring

firm events. As a class, the returns to recurring firms events based on the within-firm cross-

section represent a robust class of return predictability relative to standard factor models.

4. Potential Explanations

One way to simplify possible explanations for the events we explore, is to divide events

into three broad categories predictable announcements, predictable distributions, and the

interim periods between the two. Not all events have all instances, but to the extent that these

categories cut across multiple events, they lend themselves to similar potential explanations.

4.1 Potential Explanations for Announcement Returns

Risk

The portfolios yield similar abnormal returns under a broad range of risk models, which

is expected since most of the variation is within the same firm. In the case of earnings or

quarterly dividends, the same set of firms is in the long portfolio for 4 months of the year, and in

the short portfolio for 8 months of the year (at half the weight, since there are twice as many

short firms in any given month). As a consequence, loadings on fixed factors, controlled or

uncontrolled, will be roughly zero.

The factor regressions above control explicitly for time-varying loadings on standard

factors over the course of the year. For example, if firms have larger market betas in their

15
earnings months than other months, the long-short portfolio would control for this and yield a

positive market beta. As a consequence, the only risk factors that could explain the results

require time variation in some factor that is not controlled for.

One possible factor advanced in Savor and Wilson (2016) is systematic risk associated

with the announcement itself. To test this idea, they form a portfolio of expected earnings

announcers minus other firms every week, and show that a firms beta with respect to the factor

explains the magnitude of its earnings announcement returns. As with any factor-based

argument, the implication is that the factor formed on the aggregate earnings announcement

difference portfolio is sufficiently distinct from the individually sorted firms. As a result, if it

explains the individual portfolio alphas, this is because the covariance with a systematic factor is

driving the returns, consistent with a risk story (or systematically covarying mispricing).

Barber et al. (2013) argue this conclusion is not strongly supported in international data

(though the premium itself is robustly present). In particular, the aggregate earnings

announcement premium in international data does not predict future aggregate earnings growth

(as it does in the US), and many of the largest country portfolios do not show significant betas on

the aggregate factor. The aggregate earnings risk factor also does not explain the returns to

earnings seasonality. While it is plausible that a firms largest quarter might be more exposed to

aggregate earnings news, in practice the seasonality portfolio shows zero loadings on the

aggregate earnings factor (Chang et al. (2016)).

Instead, Barber et al. (2013) argue that the premium is related to the increase in

idiosyncratic risk surrounding the announcement. Countries with greater increases in

idiosyncratic risk display greater earnings returns. Importantly, much of the earnings returns

16
occur before the announcement itself. Earnings announcements tend to have small positive

abnormal returns of about 5 basis points per day for roughly two weeks before the announcement

(see Barber et. al 2013 Figure 3 Panel A). On the day of the earnings announcement there is a

large spike in returns of roughly 20 basis points with positive abnormal returns for a period after

the announcement as well. Johnson and So (2017a) argue for a related model where dealer

inventory risk explains the premium in the run-up to the announcement. Any model of

idiosyncratic risk driving returns implicitly requires the assumption that investors have portfolio

constraints preventing them from holding a fully diversified portfolio, otherwise only systematic

factors should matter.

The pre-announcement returns are puzzling under many explanations. Earnings dates are

pre-announced (e.g. Boulland and Dessaint (2017)) so it is not clear why there should be

idiosyncratic risk, or inventory risk for that matter, until immediately before the announcement.

Conditional on the idiosyncratic risk, it may make sense to demand a premium, but without

actual news in the period, the underlying source of this risk is uncertain. 11

Biased Expectations

Biased expectations due to probability mistakes seem plausible as an explanation for a

number of aspects of return predictability around earnings, but also struggle to explain the pre-

announcement earnings returns. Eades, Hess and Kim (1985) argue that high returns around

expected dividend announcements could be driven by investors underestimating the probability a

firm will continue to pay dividends, or the dividend size. This could apply to earnings

11
In principle, risk-based arguments could apply equally to dividend, stock split or stock dividend announcements,
though this has not been argued prominently. One difference is that there is not as much of a run-up in prices in the
period before the announcement for dividends, see Hartzmark and Solomon (2013) Figure 3, which shows some
significant returns in the two days before the announcement, but much less than on the announcement day itself.

17
announcements too with pessimism related to the level of earnings. 12 This explanation suggests

returns at the announcement itself due to a predictable surprise, not beforehand as is in the data.

For the earnings seasonality effect, Chang et al. (2016) document that analysts are more

positively surprised in positive seasonal quarters, consistent with pessimism in these quarters.

This pessimism arises due to a recency bias. Earnings cycle between low and high levels, so

investors overweight recent low signals right before the high quarter. Consistent with a

predictable surprise on announcement, the earnings seasonality effect occurs around the

announcement itself, not beforehand. 13 In this regard, seasonality has similarities with other

evidence of investors failing to fully incorporate past announcement information, like post

earnings announcement drift (Ball and Brown (1968)), contrast effects in earnings (Hartzmark

and Shue (2017)) and failures to incorporate information in announcement timing (Johnson and

So (2017b), Boulland and Dessaint (2017).

Investor Attention

Another potential explanation for announcement returns is increased investor attention.

Frazzini and Lamont (2006) find that firms whose volume increases the most around their

earnings announcement have the largest earnings announcement premiums. The idea that

increased attention could drive high returns is related to Miller (1977) whereby disagreement and

short sale constraints can result in overpricing. Without the ability or willingness to short sell,

disagreement will result in the most optimistic investors setting the price even if beliefs are on

average correct. If more investors pay attention to the stock, but the supply of shares is fixed,

12
Such pessimism could be micro-founded by firms walking expectations of analysts and investors down to beatable
forecasts (e.g. Richardson, Teoh and Wysocki 2004).
13
For other announcements, like dividends, predictable surprises are a potential explanation, but without a
microfoundation it is difficult to find independently testable predictions to distinguish predictable surprises from
other explanations.

18
then the opinion of shareholders will become more optimistic, and prices will rise. 14 Empirically,

Da, Engelberg and Gao (2011) show that increased attention proxied by Google searches is

associated with higher IPO returns. Moreover, increased attention could potentially explain the

high returns both on the announcement, and also in the periods immediately before and after.

The strongest testable predictions of an attention explanation are that higher returns are

associated with higher attention. While volume is a noisy measure of attention, Frazzini and

Lamont (2006) find volume spikes at the announcement, consistent with it driving announcement

returns. Hartzmark and Solomon (2013) show that volume also spikes around dividend

announcements and in the days subsequent which have high returns, while volume is abnormally

low in the period after the ex-day which has low returns. These patterns are consistent with

volume playing some role in the high returns, though admittedly volume has other interpretations

than simply attention, especially around dividend ex-dates.

Other patterns in returns around earnings announcements are less easily explained by

volume. Barber et al. (2013) show that the high returns in the pre-announcement period are

negatively correlated with volume. In addition, Chang et al. (2016) show that volume patterns

within the firms time series do not predict returns.

Summary

The interpretation of the announcement level returns is not straightforward, and many of

the stylized facts are open to alternative interpretations under competing theories. For instance,

high volume could be an indication of greater investor attention, greater investor surprise, greater

inventory risk associated with rebalancing, or greater response to systematic news exposure. As a

14
Greater attention can also increase prices by reducing the cost of capital as in Merton (1987), though this is
usually conceived of as a long-term effect, and not something that recurs every three months.

19
consequence, it is not easy to cleanly establish a dominant channel to the exclusion of all others

based only on the established stylized facts. There is enough variation in the patterns themselves

that no single explanation neatly fits all aspects of the data.

4.2 Potential Explanations for Distribution Day and Interim Returns

In the case of dividends, stock splits, and stock dividends, there are the periods associated

with the distribution itself, most notably the ex-day and the interim period between

announcement and ex-day. Hartzmark and Solomon (2013) Figure 2 show the pattern in returns

around the ex-day using US data. To our knowledge this has not been replicated using

international data, so Figure 1 does so here (similar to Barber et al (2013) for earnings

announcements). It is broadly similar to that found in the US, though slightly stronger.

We group these events separately from the announcement effects because many of the

explanations cited for announcement returns are unlikely to explain returns in these periods.

Announcement risk, either systematic or idiosyncratic, is implausible, as all the news is released

at the announcement, and the associated uncertainty about the distribution is resolved. As a

consequence, it is not clear what would make firms riskier during these periods. Probability

mistakes and biased expectations are also unsatisfying as explanations, as all relevant

information has been released so there is no news to alter expectations. A delayed reaction to the

initial announcement is possible, but the patterns around dividends in Hartzmark and Solomon

(2013) and Figure 1 do not suggest this, as returns rise leading up to the ex-day (as the

announcement becomes further in the past) and reverse afterwards (inconsistent with the interim

returns correcting misconceptions about the firm). As a result, other explanations have been

proposed.

20
The Ex-Day, Taxes and Microstructure

Taxes have been much studied as an explanation for the ex-dividend day effect, dating

back at least to Elton and Gruber (1970). Many of these arguments relate to dividend clienteles,

whereby different investors have different dividend tax rates, and the marginal investor pays

dividend taxes. 15 Tax-related trading and price effects around dividend ex-dates seem likely to

drive at least some of the trading and pricing effects observed. However, there are reasons to

suspect that taxes are not the full story. For instance, Frank and Jagannathan (1988) show that

ex-day returns are positive in Hong Kong where neither dividends nor capital gains are taxed,

and Figure 1 shows the pattern holds across international tax regimes.

It is quite instructive to consider the phenomenon under study to not be just the ex-day

returns, but the returns in the whole period around the ex-day. As argued in Hartzmark and

Solomon (2013), it is hard to generate a parsimonious tax story explaining high returns in the

interim period, high returns on the ex-day, and negative returns after the ex-day. The Elton and

Gruber (1970) argument for the ex-day returns relies on the marginal investor being taxable and

dividend-avoiding. But the tax argument for high returns in the interim period is that they are

driven by purchases from tax-exempt dividend capture investors, implying the marginal investor

immediately before the ex-day is a tax-free and dividend-indifferent. Moreover, returns

immediately afterwards are abnormally negative, further complicating the equilibrium argument.

A related concern arises if the phenomenon under investigation includes ex-day effects around

15
For papers studying the idea that dividend tax clienteles can explain ex-day effect, see Elton and Gruber (1970)
Elton, Gruber and Blake (2005), Green and Rydqvist (1999), McDonald (2001), Graham, Michaely and Roberts
(2003), Bell and Jenkinson (2002), and others. Relatedly, there have also been other dynamic clientele models
related to taxation (e.g. Rantapuska, 2007; Koski and Scruggs, 1998; Graham and Kumar, 2006; Felixson and
Liljeblom, 2008). Allen and Michaely (2003) provide a discussion of the literature on why firms pay dividends.

21
stock splits as they lack significant tax consequences. Nonetheless, similar returns patterns are

observed.

Microstructure arguments have also been advanced as an explanation for ex-day effects,

such as in Frank and Jagannathan (1988), Dubofsky (1992) and Bali and Hite (1998). If there is a

bid-ask spread, rational investors prefer to buy on the ex-day and sell on the cum-day, which

produces positive ex-day returns. Relative to taxes, these arguments have the advantage that they

apply equally to other distributions which lower the price, like stock splits and stock dividends.

However, they also only explain ex-day returns, and have difficulty explaining positive interim

returns or negative post-period returns.

Demand for Distributions

An alternative explanation for the high returns prior to the distributions is that investors

have demand for the distribution itself. In particular, the high interim period returns for dividends

are best understood as resulting from price pressure from dividend demand (Hartzmark and

Solomon (2013)). They occur in a period with no news and no tax consequences, and are related

to various proxies for dividend-related demand, including the dividend yield, the length of the

interim period (as shorter periods will have more concentrated price pressure per unit time), and

recessions and high VIX periods (where a demand for dividends as a perceived safe stream of

income may be higher). In addition, these variables predict the reversals after the ex-day,

consistent with price pressure.

A demand for dividends is consistent with the catering theory of Baker and Wurgler

(2004), and the notion in Hartzmark and Solomon (2017) that investors suffer from the free

dividends fallacy, treating dividends as if they do not come at the expense of price declines. It

22
also is consistent with the evidence in Harris, Hartzmark and Solomon (2015) that many mutual

funds artificially juice their dividend yield by buying dividend-paying stocks before the ex-

day, thereby gaining fund flows.

The only part of the distribution-related returns that does not immediately fit with a

dividend demand story is the ex-day itself. One might think that dividend-seeking investors

would sell immediately on the ex-day, thereby driving down the price, but this does not seem to

be the case. It could be that dividend-seeking investors wait longer before selling, such as to

receive lower tax rates on qualified dividends, or they are confused about exactly which day the

share can be sold while still receiving the dividend. Alternatively, some other explanation (such

as taxes or microstructure effects or attention) may explain the ex-day itself.

The ex-day returns for other distributions, like stock splits and stock dividends, are more

puzzling. Without an obvious tax explanation, it is possible that investors have demand for the

additional shares, perhaps mistakenly thinking of them as increasing the value of their position,

similar to the way that dividends are perceived by some investors as free. These are days

associated with higher attention, so it is an open question to what extent attention and demand

interact in this setting. Finally, the high returns on the dividend pay date are shown in Berkman

and Koch (2017) to be linked to dividend reinvestment plans. Like with the interim period, the

day when money is sent to investors has no news, no uncertainty, and no obvious tax

consequences, but also has high returns. The high returns on the payment date are consistent with

some fraction of investors choosing to reinvest the proceeds of dividend payments, and

contributes to a further picture of imperfect liquidity in stocks.

23
5. Relation to Other Seasonal Patterns in Returns

Return Seasonality

While the pattern in return seasonality in Heston and Sadka (2008) share some

similarities with the recurring firm events patterns above, there are important differences. While

recurring annual events could potentially generate the pattern in returns documented in Heston

and Sadka (2008), those authors show their effect is not driven by easily identifiable events such

as earnings announcements or dividends. Moreover, Keloharju et. al (2016) examine the basic

Heston and Sadka (2008) pattern and finds that it is broader than the simple strategy in the paper

and cannot be explained using standard risk models. Analogous to the strategies based on

individual stocks, Keloharju et. al. (2016) sort within anomalies, commodities and international

stock market indices and finds similar patterns.

Part of their explanation is that if risk factors themselves have time-varying expected

returns, then sorting individual assets on same-month returns will tend to produce higher time-

varying exposure to whatever factor happens to have higher returns that month. Standard factor

regressions will not control for this, as they implicitly fit a single factor loading across all months

of the year. This could potentially explain the individual firm returns. In any event, this

explanation solves one problem but creates another it may explain individual firm

seasonalities, but it also moves the puzzle up one level to why there are seasonal patterns in the

factor returns themselves.

The same-time-period return strategies also work at shorter horizons, which further

solidifies that the results are not simply about annual firm events. Keloharju et. al 2016 show

analogous same-week-of-the-year predictive power, and Heston, Korajczyk and Sadka (2010)

24
show that same-half-hour-of-the-day patterns also exist. Bogousslavsky (2016) shows that the

time-of-day results can be potentially explained by investors periodically rebalancing at the same

time of the day, an explanation which, in theory, could apply to longer time horizons as well.

Market-wide Seasonality

A number of recurring, market-wide events with associated returns have also been

uncovered. While the macro nature of these events mean that it is more difficult to test for a

specific underlying cause, many of the same mechanism discussed above may be important.

One market-wide event that resembles the patterns in firm earnings announcements is the

high returns around macro announcements. Savor and Wilson (2013) document high market

returns on days with announcements by the Federal Reserve Open Markets Committee (FOMC).

This resembles the high firm returns on earnings announcement days. Moreover, Lucca and

Moench (2015) document that within the announcement day, most of the high market returns

occur prior to the announcement itself. This period is also noteworthy in that the high pre-

announcement returns coincide with lower than normal volume, followed by high volume

subsequent to the announcement itself. These patterns in returns and volume are similar to those

in earnings announcements, and similarly difficult to explain under standard asset pricing

models. Savor and Wilson (2013) argue for a risk-based framework to explain the results, but it

cannot account for the pre-period findings of Lucca and Moench (2015). Cieslak, Morse and

Vissing-Jorgensen (2016) document high returns in even-numbered weeks of the FOMC cycle,

which they link to the Feds decision-making process and informal communication of these

decisions.

25
 Another aspect where firm-level events show analogous patterns at the market-level is in

the effects of price pressure. In particular, Hartzmark and Solomon (2017) document higher

market returns on days with large aggregate dividend payments based on payment dates. Like the

firm-level pay date effect in Berkman and Koch (2017) aggregate dividend payments are known

in advance and have no obvious news content on the day they occur. Unlike in Berkman and

Koch (2017), Hartzmark and Solomon (2017) show that most of the market returns are driven by

investors buying shares in companies other than those that paid the dividend. High market-wide

returns as a result of dividend payment suggest that short term shifts in demand can have

noticeable effects on the market, a result also shown in the Chilean context in Da, Larrain, Sialm,

and Tessada (2017).

In addition to these market analogs of firm-level events, there are other seasonal patterns

in market returns occurring on a calendar basis. These were some of the earliest tests of weak

form market efficiency and Lakonishok and Smidt (1988) provide an overview and out of sample

tests of these findings. They find evidence of predictable marketwide returns by time of day

(Harris 1986), day of the week (Cross 1973, French 1980, Gibbons and Hess 1981, Lakonishok

and Levi 1982), time of the month (Ariel 1987) and turn of the year (Lakonishok and Smidt

1984, Schultz 1985). Hong and Yu (2009) examine intra-country variation in predictability based

on when countries take vacations and finds that vacations are associated with low volume and

low returns. These also relate to predictable shifts in mood such as holidays (Ariel 1990;

Lakonishok and Smidt 1988; Frieder and Subrahmanyam 2004; Bergsma and Jiang 2015;

Hirshleifer, Jiang, and Meng (2017)) the weather or daylight savings time (Kamstra, Kramer, and

Levi 2000; Hirshleifer and Shumway 2003). Birru (2017) finds that on Mondays the non-

speculative leg of anomalies outperform the speculative leg, while on Friday the pattern reverses,

26
consistent with time varying mood. While these purely calendar effects are harder to disentangle

from other time-series changes, they reinforce the overall point that prices respond to repeated

and predictable events, often in ways that are puzzling under standard models of market

efficiency.

6. Conclusion

Recurring firm events comprise an important and under-studied part of asset pricing.

Large, reliable returns are apparent when sorting on historical information about the timing of

corporate events. These anomalies have mostly been studied individually, but we think this

approach misses the forest for the trees, so to speak. It is a reasonable prediction that if a publicly

disclosed firm event happens on a recurring, predictable basis, it is associated with predictable

positive alphas. This stylized fact is quite unusual from an orthodox asset pricing perspective, yet

there is strong evidence in its favor.

Perhaps because the literature has not considered these events as a class, the explanation

of why these returns occur is frustratingly piecemeal, in a manner that seems at odds with the

regularity in the returns patterns. Nonetheless, to the extent that there are broad patterns that can

be discerned, it is useful to examine separately predictable announcements and predictable

distributions. Risk-based explanations, particularly those relating to idiosyncratic risk, have the

most potential for explaining announcement returns. Nonetheless, there are many patterns that

are puzzling under standard risk explanations, such as the high returns and low volume before

announcements, or greater analyst surprise around seasonal earnings patterns. There is evidence

supporting contending explanations like increased investor attention and biased expectations, but

neither parsimoniously explains all patterns in the data. Predictable distributions generate effects

27
on ex-days that have been linked to taxes and microstructure, but there appears to be a

considerable component of the high returns due to price pressure from investors seeking to buy

before a distribution is paid. In this sense, predictable price pressure is another recurring theme,

and one which has overlap with announcement explanations like predictable investor attention.

We hope that progress can be made towards uncovering more parsimonious explanations

for the range of recurring firm events. Thinking systematically about these events together is

likely to be a crucial step towards understanding. It is a field with a great deal of promise for

future research.

28
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34
 Figure 1 International Abnormal Returns Surrounding the Dividend Ex-Date

.6 .4
Abnormal Returns[%]
.20
-.2

-15 -10 -5 0 5 10 15
Days from Ex-Date

This Figure graphs the market-adjusted returns occurring around ex-dividend dates. Daily Compustat Global data
from the 39 countries with dividend information that can be matched to the CRSP country-specific market return
index are used. Abnormal returns are the daily return minus the market return of the given country, winsorised at the
99.9% level. The x-axis is the day relative to the ex-date with the bar height being the average abnormal return for
all observations that occurred that many days before or after the ex-date.

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 Table 1 Monthly Value Weighted Strategies Based on Recurring Events

Panel A: Long-Short
Earnings
Dividend Month Announcement Earnings Returns Dividend Special
Premium Premium Seasonality Seasonality Increase Stock Dividend Dividend
Hartzmark and Frazzini and Heston and Sadka
Chang et. al 2017 Bessembinder and Zhang 2014
Solomon 2013 Lamont 2007 2008
Raw 0.276 0.485 0.946 0.358 0.387 0.417 0.476
(7.25) (5.63) (5.73) (2.05) (3.74) (2.24) (2.59)
CAPM 0.272 0.475 0.404 0.973 0.477 0.388 0.459
(7.08) (5.46) (2.29) (5.85) (4.69) (2.07) (2.48)
3-Factor 0.273 0.526 0.451 1.118 0.533 0.376 0.467
(7.12) (6.04) (2.53) (6.95) (5.35) (1.99) (2.51)
4-Factor 0.282 0.477 0.481 0.998 0.508 0.420 0.538
(7.14) (5.41) (2.65) (6.08) (4.96) (2.16) (2.79)
5-Factor 0.332 0.543 0.411 0.938 0.309 0.292 0.644
(7.35) (6.00) (2.24) (4.80) (3.13) (0.99) (2.91)
4-Factor 0.346 0.501 0.531 0.907 0.547 0.517 0.914
+ Liquidity (7.29) (5.54) (2.84) (4.27) (4.70) (1.62) (3.83)
4-Factor 0.353 0.485 0.439 0.981 0.440 0.561 0.872
+ UmO (6.86) (5.20) (2.26) (4.26) (3.47) (1.60) (3.27)
5-Year Lag
5-Factor 0.282 0.551 0.538 1.004 0.254 0.222 1.042
(5.68) (5.34) (2.66) (5.90) (2.36) (0.78) (4.71)
Panel B: Long Only
4-Factor 0.226 0.326 0.830 0.418 0.417 0.575 0.492
(7.07) (4.56) (5.36) (4.34) (4.30) (3.19) (2.66)
5-Factor 0.104 0.371 0.670 0.585 0.253 0.331 0.444
(3.07) (5.06) (4.37) (5.10) (2.71) (1.23) (2.20)
4-Factor 0.210 0.347 0.889 0.546 0.449 0.504 0.725
+ Liquidity (5.07) (4.74) (5.59) (4.42) (4.15) (1.71) (3.26)
4-Factor 0.154 0.350 0.738 0.616 0.368 0.500 0.669
+ UmO (3.49) (4.64) (4.49) (4.57) (3.12) (1.54) (2.72)
# Stocks 529 1257 175 118 40 8 12
This table presents value-weighted abnormal returns (in percent) of monthly strategies based on recurring events.
Returns Seasonality is long the top quintile of past calendar month returns based on the prior five years returns
and shorts the bottom quintile. Earnings Announcement Premium is long firms with an earnings announcement 12
months prior and shorts other firms. Earnings Seasonality is long firms in the top quintile of earnings seasonality
and short firms in the bottom quintile of seasonality in predicted announcement months. Dividend Month
Premium is long firms with a predicted dividend and shorts dividend paying firms without a predicted dividend.
These portfolio returns are regressed on each factor model, and the resulting intercept, or alpha, is displayed in the
table. The relevant factor model is listed in the first column. In terms of factor models the CAPM includes the
excess market return, 3-factor adds HML and SMB from Fama and French (1993), 4-Factor adds momentum from
Carhart (1997), 5-factor is the three factors plus RMW and CMA from Fama and French (2016). Liquidity is the
Pastor-Stambaugh (2003) liquidity factor and UmO is from Hirshleifer and Jiang (2010). 5-Year Lag means the
sorting variable is lagged by 5 years relative to the portfolio formation date. # stocks is the median number of stocks
in the long portfolio. The top value is the coefficient, the bottom value in parentheses is the t-statistic. *, **, and ***
indicate statistical significance at the 10%, 5%, and 1%, level respectively.

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