Objective Estimation Versus Subjective Perceptions of Earnings Patterns and Post‐Earnings‐Announcement Drift

30 Pages Posted: 5 Jun 2014

See all articles by Allen W. Bathke

Allen W. Bathke

Florida State University - Department of Accounting

Richard M. Morton

Florida State University - Department of Accounting

Matthew Notbohm

University of North Dakota

Tianming Zhang

Florida State University - Department of Accounting

Date Written: June 2014

Abstract

We investigate how the market's subjective estimates of autocorrelation in quarterly earnings vary with objective time‐series estimates. Our results suggest that investors increasingly underestimate the correlation as the autocorrelation level increases, and as a result, the post‐earnings‐announcement drift (PEAD) increases with the level of autocorrelation. We further show that the ability of autocorrelation to explain variation in the PEAD is robust to alternative explanations based on risk and institutional factors. Additional analysis indicates that the market's inefficiency in assessing the existence and magnitude of autocorrelation (and the related impact on PEAD) is inversely related to the richness of the information environment.

Keywords: Post‐earnings‐announcement drift, Market inefficiency, Information environment

Suggested Citation

Bathke, Allen W. and Morton, Richard M. and Notbohm, Matthew and Zhang, Tianming (Tim), Objective Estimation Versus Subjective Perceptions of Earnings Patterns and Post‐Earnings‐Announcement Drift (June 2014). Accounting & Finance, Vol. 54, Issue 2, pp. 305-334, 2014. Available at SSRN: https://ssrn.com/abstract=2446267 or http://dx.doi.org/10.1111/acfi.12012

Allen W. Bathke (Contact Author)

Florida State University - Department of Accounting ( email )

419 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-7888 (Phone)

Richard M. Morton

Florida State University - Department of Accounting ( email )

Room No. 421
Tallahassee, FL 32306-8234
United States
850-644-7877 (Phone)

Matthew Notbohm

University of North Dakota ( email )

Box 8366
Grand Forks, ND 58202
United States

Tianming (Tim) Zhang

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

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