ABSTRACT This study empirically examines the role of shocks to macro-uncertainty in shaping the responses of stock market participants to firm-specific earnings news. Specifically, I find that investors place greater weight on bad news following an increase in macro-uncertainty. By contrast, I find that investors place equal weight on both good and bad news following a decrease in macro-uncertainty. Furthermore, my findings show that these effects are more pronounced (1) for firms whose prior returns are more correlated with macro-uncertainty, (2) for firms that experience abnormally low trading volume during the earnings announcement, (3) for firms with relatively lower levels of institutional ownership, and (4) for firms with relatively higher information uncertainty. In sum, these findings provide novel empirical evidence that investors behave in a manner consistent with ambiguity aversion, with the effects strongest among unsophisticated investors.

ABSTRACT This paper investigates the extent to which delayed expected loan loss recognition ( DELR ) is associated with greater vulnerability of banks to three distinct dimensions of risk: (1) stock market liquidity risk, (2) downside tail risk of individual banks, and (3) codependence of downside tail risk among banks. We hypothesize that DELR increases vulnerability to downside risk by creating expected loss overhangs that threaten future capital adequacy and by degrading bank transparency, which increases financing frictions and opportunities for risk‐shifting. We find that DELR is associated with higher correlations between bank‐level illiquidity and both aggregate banking sector illiquidity and market returns (i.e., higher liquidity risks) during recessions, suggesting that high DELR banks as a group may simultaneously face elevated financing frictions and enhanced opportunities for risk‐shifting behavior in crisis periods. With respect to downside risk, we find that during recessions DELR is associated with significantly higher risk of individual banks suffering severe drops in their equity values, where this association is magnified for banks with low capital levels. Consistent with increased systemic risk, we find that DELR is associated with significantly higher codependence between downside risk of individual banks and downside risk of the banking sector. We theorize that downside risk vulnerability at the individual bank level can translate into systemic risk by virtue of DELR creating a common source of risk vulnerability across high DELR banks simultaneously, which leads to risk codependence among banks and systemic effects from banks acting as part of a herd.