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http://ssrn.com/abstract=899902
 
 

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Implications of Transaction Costs for the Post-Earnings-Announcement Drift


Jeffrey Ng


Singapore Management University - School of Accountancy

Tjomme O. Rusticus


London Business School; Northwestern University - Kellogg School of Management

Rodrigo S. Verdi


Massachusetts Institute of Technology (MIT)

October 2007


Abstract:     
This paper examines the effect of transaction costs on the post-earnings-announcement drift (PEAD). Using standard market microstructure features we show that transaction costs constrain the informed trades that are necessary to incorporate earnings information into price. This leads to weaker return responses at the time of the earnings announcement and higher subsequent returns drift for firms with high transaction costs. Consistent with this prediction, we find that earnings response coefficients are lower for firms with higher transaction costs. Using portfolio analyses, we find that the profits of implementing the PEAD trading strategy are significantly reduced by transaction costs. In addition, we show, using a combination of portfolio and regression analyses, that firms with higher transaction costs are the ones that provide the higher abnormal returns for the PEAD strategy. Our results indicate that transaction costs can provide an explanation not only for the persistence but also for the existence of PEAD.

Number of Pages in PDF File: 55

Keywords: market efficiency, transaction costs, post-earnings announcement drift

JEL Classification: G12, G14, M41

working papers series


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Date posted: May 2, 2006 ; Last revised: April 18, 2013

Suggested Citation

Ng, Jeffrey and Rusticus, Tjomme O. and Verdi, Rodrigo S., Implications of Transaction Costs for the Post-Earnings-Announcement Drift (October 2007). Available at SSRN: http://ssrn.com/abstract=899902 or http://dx.doi.org/10.2139/ssrn.899902

Contact Information

Jeffrey Ng
Singapore Management University - School of Accountancy ( email )
60 Stamford Road
Room 4008
Singapore, 178900
Singapore
+6568280543 (Phone)

Tjomme O. Rusticus (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
Rodrigo S. Verdi
Massachusetts Institute of Technology (MIT) ( email )
Sloan School of Management
100 Main Street E62-679
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)
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