The information content of unexpected stock returns: Evidence from intellectual capital

- We decompose unexpected returns into two news and develop a model to analyze the factors that cause shocks of returns.
- We examine how the U.S. stock market reacts to intellectual capital news and expected return news.
- Intellectual capital news is the main driver of stock returns and excess stock returns.
- The U.S. stock market still underreacts to intellectual capital news; especially to unrecorded intellectual capital news.

This paper decomposes a firm's unexpected stock returns (unexpected excess stock returns) into intellectual capital news and expected return news (expected excess stock return news) and develops a variance decomposition model to analyze the factors that cause shocks to stock returns and excess stock returns. We also split intellectual capital into recorded and unrecorded intellectual capital, and investigate the value relevance of expected return news and recorded and unrecorded intellectual capital news.The paper further examines how the U.S. stock market reacts to intellectual capital news and expected return news. The results show that intellectual capital news is the main driver of stock returns and excess stock returns. After decomposing intellectual capital into recorded intellectual capital and unrecorded intellectual capital, unrecorded intellectual capital news is the dominant driver of stock returns and excess stock returns, followed by recorded intellectual capital news. Overall, this study suggests that the U.S. stock market still underreacts to intellectual capital news; especially unrecorded intellectual capital news.