Post-Earnings Announcement Drift in Spain and Behavioural Finance Models

Abstract:     
Our study examines whether behavioural theories can explain post-earnings announcement drift (i.e., earnings momentum) in the Spanish market. In particular, we test models proposed by Daniel, Hirshleifer, and Subrahmanyan (1998), Hong and Stein (1999), and Barberis, Shleifer, and Vishny (1998). Each of these behavioural models draws on two premises – cognitive biases and limits to arbitrage – that we assume will vary with a given country's cultural and institutional features. Therefore, we must exercise caution when extrapolating the favourable results observed in the U.S. market to markets outside of the United States. Our results provide little evidence in support of the hypothesis used to test whether these models can indeed explain the earnings momentum anomaly in the Spanish market. We believe some characteristics of the Spanish market, such as its lower score on the Individualism Index, lower levels of investor protection, and code law–based legal system, may explain why our results differ from those obtained in the United States.

Keywords: post-earnings announcement drift, momentum, behavioural finance

JEL Classifications: G14, G11, M41

Accepted Paper Series