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Dr. Maria Ogneva
Associate Professor
Leventhal School of Accounting
USC Marshall School of Business

Investors face a signal extraction problem when interpreting high-frequency movements of aggregate earnings. Daily earnings announcements can simultaneously convey news about economic growth and discount rates that have opposing effects on the stock returns. Uncertainty in differentiating between the signals in earnings diminishes the stock market response to aggregate earnings. In this paper, we propose that soft information communicated by the Federal Reserve helps investors in their signal extraction problem by contextualizing earnings news. Our results are consistent with this prediction. In addition, when the Fed communication is perfectly revealing, for example in the case of an announcement of interest rate decision, we document a Fed substitution effect for the corresponding signal in earnings.