Clever tests to discriminate between alternative explanations. LaPorta, Lakonishok, Shleifer, and Vishny (Good News for Value Stocks, Journal of Finance, June 1997) study the returns on stocks on the few days surrounding their quarterly earnings announcements (relative to various expected return benchmarks). They nd that on average, high-B/M stocks earn 0.9% around an earnings announcement. In contrast, low-B/M stocks earn an average of -0.1% around an earnings announcement. The dierence is statistically signicant.

(i) High returns around earnings announcements are more likely to occur if the earnings surprise is _______. (Fill in the blank with positive or negative.)

(ii) Discuss whether the return pattern found by LaPorta et al. (1997) around earnings announcements is more consistent with the irrational expectations (behavioral) view, or the risk factor (ecient markets) view of the book-to-market eect, and explain your logic.