The High-Volume Return Premium and Post-Earnings Announcement Drift

43 Pages Posted: 18 Apr 2008  

Alina Lerman

Yale School of Management

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Richard R. Mendenhall

University of Notre Dame - Department of Finance

Date Written: April 2008

Abstract

This paper investigates the relationship among trading volume around earnings announcements, earnings forecast errors, and subsequent returns. Prior research finds a positive relation between earnings announcement period trading volume and subsequent returns (the high-volume return premium) and between earnings forecast errors and subsequent returns (post-earnings announcement drift). We find that for a sample of firms followed by analysts these effects are complementary, i.e., each retains incremental ability to predict post-earnings announcement returns. Prior research provides two competing explanations for the high-volume return premium: changes in firm visibility versus differences in risk. We provide evidence that seems to rule out risk-based explanations while supporting the visibility hypothesis.

Keywords: Market efficiency, Trading volume, High-volume return premium, Post-earnings announcement drift

JEL Classification: G14, G29, M41

Suggested Citation

Lerman, Alina and Livnat, Joshua and Mendenhall, Richard R., The High-Volume Return Premium and Post-Earnings Announcement Drift (April 2008). Available at SSRN: https://ssrn.com/abstract=1122463 or http://dx.doi.org/10.2139/ssrn.1122463

Alina Lerman (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Joshua Livnat

New York University ( email )

44 West 4th Street, Suite 10-76
Stern School of Business
New York, NY 10012-1118
United States
212-998-0022 (Phone)
212-995-4004 (Fax)

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Richard R. Mendenhall

University of Notre Dame - Department of Finance ( email )

330 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6076 (Phone)
574-631-5255 (Fax)

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