Does Differential Sensitivity to Aggregate Earnings Shocks Drive Post-Earnings-Announcement Drift?

57 Pages Posted: 18 Oct 2012

See all articles by Suresh Nallareddy

Suresh Nallareddy

Duke University - Fuqua School of Business

Date Written: October 17, 2012

Abstract

This paper finds that returns to the post-earnings-announcement drift (PEAD) strategy result from differential sensitivity of individual stock returns to aggregate earnings shocks. Larger negative aggregate earnings shocks are associated with higher PEAD returns, because stocks in the PEAD’s sell portfolio are more sensitive to aggregate earnings shocks than those in the buy portfolio. Such differential sensitivity to aggregate earnings shocks drives a significant portion of PEAD returns. During the 1985 to 2009 sample period, investors were on average negatively surprised by aggregate earnings shocks, leading to average positive returns to the PEAD strategy. Further analysis suggests that macroeconomic shocks (that work through aggregate earnings shocks) explain the variation in PEAD returns.

Keywords: post-earnings-announcement drift, earnings shock beta

JEL Classification: M41

Suggested Citation

Nallareddy, Suresh, Does Differential Sensitivity to Aggregate Earnings Shocks Drive Post-Earnings-Announcement Drift? (October 17, 2012). Available at SSRN: https://ssrn.com/abstract=2163237 or http://dx.doi.org/10.2139/ssrn.2163237

Suresh Nallareddy (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

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