How does the market process sequential earnings information?

Employing both experimental market and archival research designs, we examine whether the association between announcement period stock returns and contemporaneous news is influenced by previously disclosed earnings news. Our primary conclusion is that investors' response to the earnings surprise (actual earnings less the last forecast of the quarter) is conditional on the sign of prior earnings news (i.e., the forecast revision). We develop and test predictions based on behavioral theories of how investors will react to a series of earnings information. Our results suggest that the market's response to sequential analysts' forecasts is consistent with the application of an end-of-sequence (EoS) process resulting in a primacy effect.