Post‐Earnings Announcement Drift: Bounds on Profitability for the Marginal Investor

27 Pages Posted: 8 Oct 2011

See all articles by Robert H. Battalio

Robert H. Battalio

University of Notre Dame - Department of Finance

Richard R. Mendenhall

University of Notre Dame - Department of Finance

Date Written: November 2011

Abstract

The persistence of the post‐earnings announcement drift (PEAD) leads many to believe that trading barriers prevent investors from eliminating it. We examine two factors that have not been adequately addressed by the literature: the exact timing of earnings announcements and liquidity costs. Under a wide range of timing and cost assumptions, our results leave little doubt that over our sample period the PEAD was highly profitable after trading costs. An additional incremental investor could have earned hedged‐portfolio returns of at least 14% per year after trading costs. Over our sample period, investors did indeed leave money on the table.

Keywords: earnings, post‐earnings announcement drift, anomalies, bid‐ask spread, market microstructure, G14

Suggested Citation

Battalio, Robert H. and Mendenhall, Richard R., Post‐Earnings Announcement Drift: Bounds on Profitability for the Marginal Investor (November 2011). Financial Review, Vol. 46, Issue 4, pp. 513-539, 2011. Available at SSRN: https://ssrn.com/abstract=1940252 or http://dx.doi.org/10.1111/j.1540-6288.2011.00310.x

Robert H. Battalio (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)

Richard R. Mendenhall

University of Notre Dame - Department of Finance ( email )

330 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6076 (Phone)
574-631-5255 (Fax)

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