Abstract

http://ssrn.com/abstract=1786697
 
 

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Pre-Earnings Announcement Drift


Peter D. Easton


University of Notre Dame - Department of Accountancy

George Gao


Cornell University - Samuel Curtis Johnson Graduate School of Management

Pengjie Gao


University of Notre Dame - Mendoza College of Business

February 1, 2010


Abstract:     
We present evidence of a predictable drift in stock prices before the earnings announcements of firms that announce their earnings later than other firms in their industry. We form portfolios based on the returns of later announcers that are implied by the abnormal returns of earlier announcers and the historical pair-wise covariance of the abnormal earnings announcement date returns of earlier and later announcers. A long-short trading strategy based on these implied returns generates monthly returns of more than 100 basis points. The drift is neither due to the well-known momentum effect nor a manifestation of post-earnings announcement drift; it is evident both between the earlier announcers’ earnings announcement dates and the later announcers’ earnings announcement dates and at the later announcers’ earnings announcement dates. The continued under-reaction after later announcers’ earnings announcements is shown to be an under-reaction to the later announcers’ own earnings announcements (i.e., post-earnings announcement drift) rather than a continued under-reaction to the earnings news of earlier announcers (i.e., pre-earnings announcement drift). We show that transaction costs explain the predictability of later announcers’ returns.

Number of Pages in PDF File: 65

Keywords: return predictability, earnings\, transaction costs

JEL Classification: G12, G15

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Date posted: March 15, 2011  

Suggested Citation

Easton, Peter D. and Gao, George and Gao, Pengjie, Pre-Earnings Announcement Drift (February 1, 2010). Available at SSRN: http://ssrn.com/abstract=1786697 or http://dx.doi.org/10.2139/ssrn.1786697

Contact Information

Peter D. Easton
University of Notre Dame - Department of Accountancy ( email )
Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)
George Gao
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Sage Hall 366
Ithaca, NY 14853
United States
Pengjie Gao (Contact Author)
University of Notre Dame - Mendoza College of Business ( email )
246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)
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