Earnings Volatility, Post-Earnings Announcement Drift and Trading Frictions
Journal of Accounting Research, Forthcoming
45 Pages Posted: 23 Mar 2010 Last revised: 24 Jan 2015
Date Written: August 5, 2011
We find that lower ex-ante earnings volatility leads to higher Post-Earnings Announcement Drift (PEAD). PEAD is a function of both the magnitude of an earnings surprise and its persistence. While prior research has largely investigated market reactions to the magnitude of the earnings surprise, in this study we show that the persistence of the earnings surprise is equally important. A unique feature of the anomalous PEAD returns documented in this study concerns the association between abnormal returns and trading frictions. Besides documenting that firms with lower earnings volatility have higher abnormal returns, we also find that lower earnings volatility firms have lower trading frictions. Taken together, these findings imply that higher abnormal returns are associated with lower trading frictions. We exploit this implication to empirically demonstrate that PEAD returns due to earnings volatility are not concentrated in the firms with the largest trading frictions, which is in contrast to the findings in prior anomaly studies.
JEL Classification: M43, G24, G12, M41
Suggested Citation: Suggested Citation