Investment Horizon of Shareholders and Post-Earnings-Announcement Drift

Abstract

We hypothesize that post-earnings-announcement drift (PEAD) is caused by underreaction of long-term investors since they do not pay much attention to short-term events. Consistent with the hypothesis, empirical observations show that stocks mostly held by long-term investors exhibit strong PEAD, while stocks mostly held by short-term investors does not. The results are still robust even after transaction costs, investor recognition, temporal inattention, and reversal in earnings surprises are controlled for.

Keywords: Post-Earnings-Announcement Drift, Investment Horizon, Portfolio Turnover Level

JEL Classification: G10, G11, G12