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The High-Volume Return Premium and Post-Earnings Announcement Drift

Alina Lerman
New York University - Leonard N. Stern School of Business

Joshua Livnat
New York University

Richard R. Mendenhall
University of Notre Dame - Department of Finance

April 2008

Abstract:
This paper investigates the relationship among trading volume around earnings announcements, earnings forecast errors, and subsequent returns. Prior research finds a positive relation between earnings announcement period trading volume and subsequent returns (the high-volume return premium) and between earnings forecast errors and subsequent returns (post-earnings announcement drift). We find that for a sample of firms followed by analysts these effects are complementary, i.e., each retains incremental ability to predict post-earnings announcement returns. Prior research provides two competing explanations for the high-volume return premium: changes in firm visibility versus differences in risk. We provide evidence that seems to rule out risk-based explanations while supporting the visibility hypothesis.

Keywords: Market efficiency, Trading volume, High-volume return premium, Post-earnings announcement drift

JEL Classifications: G14, G29, M41

Working Paper Series

Date posted: April 18, 2008 ; Last revised: April 30, 2008

Suggested Citation

Lerman, Alina, Livnat, Joshua and Mendenhall, Richard R., The High-Volume Return Premium and Post-Earnings Announcement Drift (April 2008). Available at SSRN: http://ssrn.com/abstract=1122463

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Contact Information

Alina Lerman (Contact Author) New York University - Leonard N. Stern School of Business ( email ) 44 West 4th Street New York, NY 10012 United States
Joshua Livnat New York University ( email ) 44 West 4th Street, Suite 10-76 Stern School of Business New York, NY 10012-1118 United States 212-998-0022 (Phone) 212-995-4004 (Fax)
Richard R. Mendenhall University of Notre Dame - Department of Finance ( email ) 330 Mendoza College of Business Notre Dame, IN 46556-5646 United States 574-631-6076 (Phone) 574-631-5255 (Fax)