Post Loss/Profit Announcement Drift

64 Pages Posted: 21 Jan 2014

See all articles by Karthik Balakrishnan

Karthik Balakrishnan

Rice University - Jesse H. Jones Graduate School of Business

Eli Bartov

NYU Stern School of Business

Lucile Faurel

Arizona State University

Multiple version iconThere are 2 versions of this paper

Date Written: November 2008

Abstract

We document a failure of the market to price the implications of a current loss (profit) for a future loss (profit). In a 120-day window following the quarterly earnings announcement date, a portfolio of firms with extreme losses (profits) exhibits a -6.58 percent (3.55 percent) abnormal return. These patterns in stock returns translate into an annualized return of approximately 21 percent on a hedge portfolio that takes a long position in an extreme profit firm quintile and a short position in an extreme loss firm quintile. The results also demonstrate that this loss/profit anomaly is incremental to, and more pronounced than previously documented accounting-related anomalies. In an effort to explain this finding, we show that this mispricing is related to differences between conditional and unconditional probabilities of losses/profits, as if stock prices do not fully reflect conditional probabilities in a timely fashion. A battery of sensitivity tests shows that this loss/profit anomaly is robust to alternative risk adjustments, distress risk, short sales constraints, transaction costs, and sample periods.

Keywords: Loss/profit mispricing, loss/profit predictability, accounting losses, accounting profits, earnings-based anomalies

JEL Classification: G14, M41

Suggested Citation

Balakrishnan, Karthik and Bartov, Eli and Faurel, Lucile, Post Loss/Profit Announcement Drift (November 2008). NYU Stern School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=1303925

Karthik Balakrishnan

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Eli Bartov

NYU Stern School of Business ( email )

44 W. 4th Street, Suite 10-96
New York, NY 10012
United States
212.998.0016 (Phone)

Lucile Faurel

Arizona State University ( email )

W.P. Carey School of Business
School of Accountancy, B267H
Tempe, AZ 85287
United States
(480) 965-6216 (Phone)

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