Pre-Earnings Announcement Drift

65 Pages Posted: 15 Mar 2011  

Peter D. Easton

University of Notre Dame - Department of Accountancy

George Gao

T. Rowe Price; Cornell University - Samuel Curtis Johnson Graduate School of Management

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Date Written: February 1, 2010

Abstract

We present evidence of a predictable drift in stock prices before the earnings announcements of firms that announce their earnings later than other firms in their industry. We form portfolios based on the returns of later announcers that are implied by the abnormal returns of earlier announcers and the historical pair-wise covariance of the abnormal earnings announcement date returns of earlier and later announcers. A long-short trading strategy based on these implied returns generates monthly returns of more than 100 basis points. The drift is neither due to the well-known momentum effect nor a manifestation of post-earnings announcement drift; it is evident both between the earlier announcers’ earnings announcement dates and the later announcers’ earnings announcement dates and at the later announcers’ earnings announcement dates. The continued under-reaction after later announcers’ earnings announcements is shown to be an under-reaction to the later announcers’ own earnings announcements (i.e., post-earnings announcement drift) rather than a continued under-reaction to the earnings news of earlier announcers (i.e., pre-earnings announcement drift). We show that transaction costs explain the predictability of later announcers’ returns.

Keywords: return predictability, earnings\, transaction costs

JEL Classification: G12, G15

Suggested Citation

Easton, Peter D. and Gao, George and Gao, Pengjie, Pre-Earnings Announcement Drift (February 1, 2010). Available at SSRN: https://ssrn.com/abstract=1786697 or http://dx.doi.org/10.2139/ssrn.1786697

Peter D. Easton

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)

George Gao

T. Rowe Price ( email )

Baltimore, MD 21297-1215
United States

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall 314
Ithaca, NY 14853
United States

Pengjie Gao (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)

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