Investor Perceptions of Earnings Processes and Post-Announcement Drifts

47 Pages Posted: 12 Apr 2011

See all articles by Oliver M. Rui

Oliver M. Rui

China Europe International Business School (CEIBS)

Bong-Soo Lee

Korea Advanced Institute of Science and Technology (KAIST)

Date Written: April 11, 2007

Abstract

In this paper, we generalize Bernard and Thomas' (1990) "delayed response" hypothesis as an explanation of post-earnings-announcement drifts. By applying a modified version of Beveridge and Nelson’s technique of decomposing a time-series process of earnings into permanent and temporary components, we estimate the relative weight to proxy for investor perception on the temporary component of earnings. We then provide evidence that our measure of investor misperception explains post-announcement drifts after controlling for firm size and investor sophistication. These findings reinforce Bernard and Thomas' (1990) conjecture that less weight is placed on temporary components of earnings than would be appropriate if earnings processes were well understood, though not zero as Bernard and Thomas implicitly assumed in their portfolio formation rule. Our results also complement Ball and Bartov's (1996) result that investors partially, but not fully, adjust for serial correlation in seasonal differences.

Keywords: Post-earnings-announcement drifts, Time-series analysis

JEL Classification: M41, G14

Suggested Citation

Rui, Oliver M. and Lee, Bong-Soo, Investor Perceptions of Earnings Processes and Post-Announcement Drifts (April 11, 2007). Available at SSRN: https://ssrn.com/abstract=1806896 or http://dx.doi.org/10.2139/ssrn.1806896

Oliver M. Rui (Contact Author)

China Europe International Business School (CEIBS) ( email )

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Shanghai 201206
China
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HOME PAGE: http://https://www.ceibs.edu/rui-oliver

Bong-Soo Lee

Korea Advanced Institute of Science and Technology (KAIST)

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

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