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In this study, I examine the relation between earnings volatility and stock price response delay. I study the effect of the uncertainty of earnings and their components on the stock price response to value-relevant information. For more volatile earnings and earnings components, it is more complex for investors to reliably understand and impound information into stock prices. When earnings and components provide opaque and uncertain information about the future cash flows, I expect that investors are more divergent in their interpretations and delayed in arriving at their future cash flow estimates. To measure firms' response to value-relevant information, I adopt a parsimonious measure of stock price response to information developed by Hou and Moskowitz (2005). I use five-year rolling standard deviations of earnings and components for earnings and components volatility measures. As an additional earnings volatility measure, I adopt the degree to which earnings volatility deviates from cash flow volatility. My study demonstrates that earnings volatility negatively affects stock price response to information. As I hypothesize, the more volatile earnings and components are, the more delayed the market reacts to value-relevant information. Among earnings and their components, the effect of cash flow volatility is the most influential.

ABSTRACT**:  This paper examines a two‐period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the underlying overall welfare output. In a regulated environment, we consider a monopolist who faces no downstream (final good) competition but is subject to retail price regulation. We identify the welfare‐maximizing regulated prices when the unregulated market outcome is set as the benchmark. We show that if the regulator can commit to ex post regulation – that is, regulated prices that are contingent to future demand realization – then regulated prices that allow the firm to recover its total costs of production are welfare‐maximizing. Thus, under ex post price regulation there is no need to compensate the regulated firm for the option to delay that it foregoes when investing today. We argue, however, that regulators cannot make this type of commitment and, therefore, price regulation is often ex ante – that is, regulated prices are not contingent to future demand. We show that the optimal ex ante regulation, and the extent to which regulated prices need to incorporate an option to delay, depend on the nature of demand uncertainty.