Liquidity and the Post-Earnings-Announcement Drift
Emory University - Department of Finance
Boston College - Carroll School of Management
University of Lausanne; Swiss Finance Institute
University of Texas at Dallas
London Business School
March 8, 2007
AFA 2008 New Orleans Meetings Paper
The post-earnings-announcement-drift is a long standing anomaly that is in conflict with market efficiency. This paper documents that the post-earnings-announcement drift occurs mainly in the highly illiquid stocks. A trading strategy that goes long the high earnings surprise stocks and short the low earnings surprise stocks provides a value-weighted return of 0.14% in the most liquid stocks and 1.60% per month in the most illiquid stocks. The illiquid stocks have high trading costs and market impact costs. Using a multitude of estimates we find that transaction costs account for anywhere from 63% to 100% of the paper profits from the long-short strategy designed to exploit the earnings momentum anomaly. This paper provides support for the argument that transactions costs could be the source of the drift.
Number of Pages in PDF File: 35
Keywords: G11, G12, C11working papers series
Date posted: March 20, 2007 ; Last revised: August 24, 2011
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