Asymmetric Learning from Prices and Post-Earnings Announcement Drift

77 Pages Posted: 20 Nov 2013 Last revised: 24 Sep 2018

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Linh Le

University of South Florida

Jared Williams

University of South Florida

Multiple version iconThere are 2 versions of this paper

Date Written: September 14, 2018

Abstract

Motivated by research in psychology and experimental economics, we assume that investors update their beliefs about an asset's value upon observing the price, but only when the price clearly reveals that others obtained private information that differs from their own private information. In particular, we assume that investors learn from the price of an asset in an asymmetric manner--they learn from the price if they observe good (bad) private information and the price is worse (better) than what is justified based on public information alone. We show that asymmetric learning from an asset's price leads to post-earnings-announcement drift (PEAD), and that it generates arbitrage opportunities that are less attractive than alternative explanations of PEAD. In addition, our model predicts that PEAD will be concentrated in earnings surprises that are not dominated by accruals, and it also predicts that earnings response coefficients will decline in the magnitude of the earnings surprises.

Keywords: Post-Earnings Announcement Drift, Learning from Price, False Consensus Effect, Market Undereaction

JEL Classification: D80, G02, G14, M41

Suggested Citation

Choi, Jaewon and Le, Linh and Williams, Jared, Asymmetric Learning from Prices and Post-Earnings Announcement Drift (September 14, 2018). Available at SSRN: https://ssrn.com/abstract=2356721 or http://dx.doi.org/10.2139/ssrn.2356721

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Linh Le

University of South Florida ( email )

Tampa, FL 33620
United States

Jared Williams (Contact Author)

University of South Florida ( email )

Tampa, FL 33620
United States

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