Recency Bias and Post-Earnings Announcement Drift

37 Pages Posted: 22 Jul 2014

See all articles by Qingzhong Ma

Qingzhong Ma

California State University, Chico - Department of Finance and Marketing

David A. Whidbee

Washington State University - Department of Finance, Insurance and Real Estate

Wei Athena Zhang

California State University, Chico - Department of Finance and Marketing

Date Written: July 19, 2014

Abstract

In this paper we examine the role of the timing of 52-week high, or recency, in the post earnings announcement drift (PEAD) puzzle. We argue that, because investors are less likely to bid up (down) a stock price if a stock’s 52-week high occurred in the recent (distant) past, these stocks are underpriced (overpriced) and earn higher (lower) future returns. We report these findings. First, PEAD profits are mainly driven by recency bias. An enhanced strategy based on both PEAD and recency accounts for 74% of total PEAD profits. Second, the recency bias accounts for the entire PEAD profits of large stocks and of the recent 24 years. The effect of recency bias on PEAD exists even after controlling for price proximity to 52-week high. Our evidence suggests that recency bias plays an important role in PEAD.

Keywords: Recency bias, Anchoring, 52-week high, Post-earnings announcement drift, PEAD

JEL Classification: G12, G14

Suggested Citation

Ma, Qingzhong and Whidbee, David A. and Zhang, Wei Athena, Recency Bias and Post-Earnings Announcement Drift (July 19, 2014). Available at SSRN: https://ssrn.com/abstract=2469308 or http://dx.doi.org/10.2139/ssrn.2469308

Qingzhong Ma

California State University, Chico - Department of Finance and Marketing ( email )

325 Tehama Hall
Chico, CA 95929
United States

David A. Whidbee

Washington State University - Department of Finance, Insurance and Real Estate ( email )

Todd 470
Pullman, WA 99164-4746
United States
509-335-3098 (Phone)
509-335-3857 (Fax)

Wei Athena Zhang (Contact Author)

California State University, Chico - Department of Finance and Marketing ( email )

United States

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