Post Loss/Profit Announcement Drift
London Business School
New York University
University of California, Irvine
November 20, 2009
Journal of Accounting & Economics (JAE), Vol. 50, No. 1, 2010
We document a market failure to fully respond to loss/profit quarterly announcements. The annualized post portfolio formation return spread between two portfolios formed on extreme losses and extreme profits is approximately 21 percent. This loss/profit anomaly is incremental to previously documented accounting-related anomalies, and is robust to alternative risk adjustments, distress risk, firm size, short sales constraints, transaction costs, and sample periods. In an effort to explain this finding, we show that this mispricing is related to differences between conditional and unconditional probabilities of losses/profits, as if stock prices do not fully reflect conditional probabilities in a timely fashion.
Number of Pages in PDF File: 56
Keywords: Loss/profit mispricing, loss/profit predictability, accounting losses/profits, post earnings announcement drift, earnings-based anomalies
JEL Classification: M41, G14Accepted Paper Series
Date posted: November 21, 2009 ; Last revised: May 7, 2013
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