Underreaction or Overreaction: The Post Earnings Announcement Drift

43 Pages Posted: 6 Apr 2014 Last revised: 18 Aug 2017

See all articles by Abdulaziz M. Alwathainani

Abdulaziz M. Alwathainani

Alfaisal University; York University

David A. Dubofsky

University of Louisville - Department of Finance

Haitham Al-Zoubi

Alfaisal University

Date Written: July 18, 2016

Abstract

We test whether the well-documented post-earnings-announcement drift is a manifestation of an investor underreaction or overreaction to extremely good or bad earnings news. Using the market reaction to extreme earnings surprises (i.e., SUE) in quarter Qt as a reference point, we show that firms reporting a SUE in subsequent quarter Qt 1 that confirms their initial quarter Qt SUE ranking in the same highest or lowest SUE quintiles generate an incremental price run that moves in the same direction as that of the initial SUE. However, the price impact of the confirming SUE signal is weaker than that of its initial SUE. Our findings are robust to the Fama-French three-factor daily regression extended by the momentum factor and a number of other robustness tests. Our finding is not consistent with the prevalent view that investors underreact to earnings news. To the contrary, the results suggest an initial investor overreaction to extreme SUE signals.

Keywords: Earnings surprise; Initial SUE; Confirming SUE signals; Disconfirming SUE evidence; Overreaction; Price reversals

JEL Classification: G14

Suggested Citation

Alwathainani, Abdulaziz M. and Dubofsky, David A. and Al-Zoubi, Haitham, Underreaction or Overreaction: The Post Earnings Announcement Drift (July 18, 2016). Available at SSRN: https://ssrn.com/abstract=2420799 or http://dx.doi.org/10.2139/ssrn.2420799

Abdulaziz M. Alwathainani (Contact Author)

Alfaisal University ( email )

P.O. Box 50927
Riyadh, 11533
Saudi Arabia

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

David A. Dubofsky

University of Louisville - Department of Finance ( email )

PO BOX 844000
Louisville, KY 40292
United States
502-852-3016 (Phone)
502-852-6072 (Fax)

HOME PAGE: http://cobweb2.louisville.edu/profile/Dubofsky.html

Haitham Al-Zoubi

Alfaisal University ( email )

P.O. Box 50927
Riyadh, 11533
Saudi Arabia

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