Earnings Announcement Premia and the Limits to Arbitrage

50 Pages Posted: 8 Oct 2008

See all articles by Daniel A. Cohen

Daniel A. Cohen

University of Texas at Dallas - Naveen Jindal School of Management

Aiyesha Dey

Harvard Business School

Thomas Z. Lys

Northwestern University - Kellogg School of Management

Shyam V. Sunder

University of Arizona - Department of Accounting

Multiple version iconThere are 3 versions of this paper

Date Written: December 2004

Abstract

We document that earnings announcement-day premia persist beyond the sample period of earlier studies, over different disclosure environments and remain robust to the refinement of using the expected announcement day rather than the actual announcementday. A portfolio of announcing firms yields returns in excess of the corresponding risk.Excluding announcers from a well-diversified portfolio, while reducing the standarddeviation of that portfolio, also reduces its Sharpe ratio, indicating that this strategyresults in a less favorable risk-return trade-off. Finally, we provide evidence that the premia are dramatically reduced when the announcement risk is reduced through preannouncements. In addition, we document that the continued presence of this premia islikely to result from limits to arbitrage. These findings are consistent with the view that the announcement period returns are likely to represent compensation for announcement risk.

Suggested Citation

Cohen, Daniel A. and Dey, Aiyesha and Lys, Thomas Z. and Sunder, Shyam, Earnings Announcement Premia and the Limits to Arbitrage (December 2004). NYU Working Paper No. DANIEL A. COHEN-10. Available at SSRN: https://ssrn.com/abstract=1280717

Daniel A. Cohen (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
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Aiyesha Dey

Harvard Business School ( email )

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Thomas Z. Lys

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
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United States
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847-467-1202 (Fax)

Shyam Sunder

University of Arizona - Department of Accounting ( email )

210 L McClelland Hall
1130 E Helen St
Tucson, AZ 85721
United States

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