Expected Earnings and the Post-Earnings-Announcement Drift
University of California, Berkeley - Haas School of Business
University of Delaware - Alfred Lerner College of Business and Economics
University of Texas at Dallas
Boston College - Carroll School of Management
February 1, 2013
This paper studies competing explanations for the Post-Earnings-Announcement Drift (PEAD) anomaly. We decompose analyst-forecast error into a component predictable by prior stock returns and a surprise component, with the predictable component interpreted as expected earnings. Under the investment-based asset-pricing explanation for PEAD, both components are related to future earnings and thus to expected returns. In contrast, under the investor underreaction explanation, PEAD is driven only by the surprise component. We find that purging the expected earnings component reduces PEAD profits by up to 54%, which suggests that a substantial part of the PEAD is consistent with investment-based asset pricing.
Number of Pages in PDF File: 43
Keywords: Analyst forecasts, asset pricing, predictability, post-earnings-announcement drift
JEL Classification: G12, G14, M41working papers series
Date posted: August 11, 2009 ; Last revised: February 5, 2013
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