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Post Loss/Profit Announcement Drift

56 Pages Posted: 21 Nov 2009 Last revised: 7 May 2013

Karthik Balakrishnan

London Business School

Eli Bartov

NYU Stern School of Business

Lucile Faurel

Arizona State University

Multiple version iconThere are 2 versions of this paper

Date Written: November 20, 2009

Abstract

We document a market failure to fully respond to loss/profit quarterly announcements. The annualized post portfolio formation return spread between two portfolios formed on extreme losses and extreme profits is approximately 21 percent. This loss/profit anomaly is incremental to previously documented accounting-related anomalies, and is robust to alternative risk adjustments, distress risk, firm size, short sales constraints, transaction costs, and sample periods. 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.

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

JEL Classification: M41, G14

Suggested Citation

Balakrishnan, Karthik and Bartov, Eli and Faurel, Lucile, Post Loss/Profit Announcement Drift (November 20, 2009). Journal of Accounting & Economics (JAE), Vol. 50, No. 1, 2010. Available at SSRN: https://ssrn.com/abstract=1510321 or http://dx.doi.org/10.2139/ssrn.1510321

Karthik Balakrishnan

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Eli Bartov (Contact Author)

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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