Corporate earnings announcements and stock market bubbles

Abstract

We examine how corporate earnings announcement shocks influence US stock market bubbles using daily data from January 1990 to June 2025. After identifying positive and negative bubbles, we derive corporate earnings announcement shocks using a heteroskedastic vector autoregression model and estimate their dynamic effects on bubble indicators using local projections, with vector autoregression-based impulse responses reported as a robustness check. Positive earnings shocks boost positive bubbles, particularly at the medium to long-term, while reducing negative bubbles at the short-term. Therefore, favorable earnings news can fuel prolonged speculative episodes by increasing investor optimism, and lead to deep crashes but mild recoveries.

HIGHLIGHTS • Link stock bubbles to corporate earnings announcements using local projections. • Apply vector autoregression-based impulse responses as a robustness check. • Positive earnings shocks boost positive bubbles, notably in the medium to long-term. • Positive earnings shocks reduce negative bubbles in the short-term.