Cryptocurrency Disruption and Investors' Reaction to Earnings Announcements

In this paper, we study the relationship between the cryptocurrency market and investor reactions to earnings news. Building on the limited investor attention literature, we hypothesize that the cryptocurrency market distracts investors from earnings news. We measure the cryptocurrency distraction as the magnitude of two-week cumulative cryptocurrency returns before earnings announcements, and find that the cryptocurrency distraction is associated with a weaker price reaction to earnings surprises. Our result is robust when using the Chinese bans on cryptocurrency offerings and exchanges as sources of exogenous variation in cryptocurrency distraction. Consistent with the limited attention hypothesis, we document that busy earnings announcement days experience greater cryptocurrency distraction. To corroborate the main finding, we further show that the Google search volume and abnormal trading volume around earnings announcements are lower when there is a greater amount of cryptocurrency distraction. Cryptocurrency distraction effect is concentrated in retail trading rather than institutional trading, and consistently, is associated with more severe information asymmetry. Overall, our study provides evidence that cryptocurrency, a class of asset with no intrinsic value, disrupts information processing and thus price formation in the equity market.