Drift or Jump: What Drives Post-Earnings Announcement Stock Returns?

Advances in Quantitative Analysis of Finance and Accounting (AQAFA), Forthcoming

36 Pages Posted: 30 Jun 2013

See all articles by Linda H. Chen

Linda H. Chen

University of Idaho

George J. Jiang

Washington State University

Multiple version iconThere are 2 versions of this paper

Date Written: September 13, 2012

Abstract

One of the contentious issues regarding the post-earnings announcement drift (PEAD) is whether the abnormal stock return is driven by investors’ delayed reaction to earnings information or by unexpected information shocks subsequent to earnings announcement. In this paper, we disentangle unexpected large changes in stock prices, known as jumps, from total stock returns. Although on average jump occurs only once per firm quarter, it accounts for up to 40% of the return differential between top and bottom SUE deciles. This is evidence that a significant part of PAED is driven by unexpected information shocks. Nevertheless, the drift component still explains at least 50% of the variation of anomalous PEAD returns. The findings suggest that PEAD cannot be entirely attributed to investors’ delayed reaction to earnings information, but neither can the hypothesis be ruled out. In particular, we find that delayed reaction is more pronounced following positive earnings surprises.

Keywords: Post-earnings announcement drift, delayed reaction to earnings information, unexpected information shocks, stock price jumps

Suggested Citation

Chen, Linda H. and Jiang, George, Drift or Jump: What Drives Post-Earnings Announcement Stock Returns? (September 13, 2012). Advances in Quantitative Analysis of Finance and Accounting (AQAFA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2287295

Linda H. Chen

University of Idaho ( email )

Department of Accounting
College of Business and Economics
Moscow, ID 83944-3174
United States

George Jiang (Contact Author)

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

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