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Expected Earnings and the Post-Earnings-Announcement Drift

43 Pages Posted: 11 Aug 2009 Last revised: 5 Feb 2013

Yaniv Konchitchki

University of California, Berkeley - Haas School of Business

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics

Gil Sadka

University of Texas at Dallas

Ronnie Sadka

Boston College - Carroll School of Management

Date Written: February 1, 2013

Abstract

This paper studies competing explanations for the Post-Earnings-Announcement Drift (PEAD) anomaly. We decompose analyst-forecast error into a component predictable by prior stock returns and a surprise component, with the predictable component interpreted as expected earnings. Under the investment-based asset-pricing explanation for PEAD, both components are related to future earnings and thus to expected returns. In contrast, under the investor underreaction explanation, PEAD is driven only by the surprise component. We find that purging the expected earnings component reduces PEAD profits by up to 54%, which suggests that a substantial part of the PEAD is consistent with investment-based asset pricing.

Keywords: Analyst forecasts, asset pricing, predictability, post-earnings-announcement drift

JEL Classification: G12, G14, M41

Suggested Citation

Konchitchki, Yaniv and Lou, Xiaoxia and Sadka, Gil and Sadka, Ronnie, Expected Earnings and the Post-Earnings-Announcement Drift (February 1, 2013). Available at SSRN: https://ssrn.com/abstract=1446929 or http://dx.doi.org/10.2139/ssrn.1446929

Yaniv Konchitchki

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States

Gil Sadka (Contact Author)

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

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