Liquidity and the Post-Earnings-Announcement Drift

36 Pages Posted: 18 May 2009

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Amit Goyal

University of Lausanne; Swiss Finance Institute

Gil Sadka

University of Texas at Dallas

Ronnie Sadka

Boston College - Carroll School of Management

Lakshmanan Shivakumar

London Business School

Multiple version iconThere are 3 versions of this paper

Date Written: May 12, 2009

Abstract

The post-earnings-announcement drift is a longstanding anomaly that conflicts with market efficiency. This study documents that the post-earnings-announcement drift occurs mainly in highly illiquid stocks. A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a monthly value-weighted return of 0.04 percent in the most liquid stocks and 2.43 percent in the most illiquid stocks. The illiquid stocks have high trading costs and high market impact costs. By using a multitude of estimates, the study finds that transaction costs account for 70-100 percent of the paper profits from a long-short strategy designed to exploit the earnings momentum anomaly.

Keywords: Research Sources, Equity Investments, Technical Analysis, Investment Theory, Efficient Market Theory, Portfolio Management, Equity Strategies

JEL Classification: G40

Suggested Citation

Chordia, Tarun and Goyal, Amit and Sadka, Gil and Sadka, Ronnie and Shivakumar, Lakshmanan, Liquidity and the Post-Earnings-Announcement Drift (May 12, 2009). Financial Analysts Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1403342

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Amit Goyal

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Gil Sadka

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Lakshmanan Shivakumar (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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