Firm Complexity and Post-Earnings-Announcement Drift
56 Pages Posted: 29 Nov 2013 Last revised: 1 Dec 2016
Date Written: December 1, 2016
We show that the post earnings announcement drift (PEAD) is stronger for conglomerates than single-segment firms. Conglomerates, on average, are larger than single segment firms, so it is unlikely that limits-to-arbitrage drive the difference in PEAD. Rather, we hypothesize that market participants find it more costly and difficult to understand firm-specific earnings information regarding conglomerates which slows information processing about them. In support of our hypothesis, we find that, compared to single-segment firms with similar size, conglomerates have relatively low institutional ownership and short interest, are covered by fewer analysts, these analysts have less industry expertise and also make larger forecast errors. Finally, we find that an increase in firm complexity leads to larger PEAD and document that more complicated conglomerates have greater PEAD. Our results are robust to a long list of alternative explanations of PEAD as well as alternative measures of firm complexity.
Keywords: post-earnings-announcement-drift, conglomerates, complicated firms, business complexity
JEL Classification: G11, G12, G14, G32, G33, M4, L14, D82
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