Evidence that Capital Markets Learn from Academic Research: Earnings Surprises and the Persistence of Post-Announcement Drift

38 Pages Posted: 11 Jan 2001

See all articles by W. Bruce Johnson

W. Bruce Johnson

University of Iowa - Department of Accounting

William C. Schwartz

University of Arizona - Department of Accounting

Date Written: December 2000

Abstract

We investigate the relation between earnings surprises and post-announcement stock returns for 1991-1997, and show that the profit opportunities previously associated with simple trading strategies designed to exploit the drift phenomenon have now been substantially eliminated. This profitability decline does not appear to be due to increased earnings "noise" from transitory items or to structural changes in the serial correlation of earnings surprises. The post-announcement drift persists where arbitrage costs are highest; that is, among small NYSE/AMEX firms, and among firms with little or no analyst following or with low stock prices. The evidence is consistent with the notion that investors used earnings surprise trading strategies to arbitrage the drift once the phenomenon had been well documented in academic research.

Keywords: Post-earnings announcement drift, post-announcement drift, standaridized unexpected earnings, market efficiency

JEL Classification: G14, M41

Suggested Citation

Johnson, W. Bruce and Schwartz, William Carleton, Evidence that Capital Markets Learn from Academic Research: Earnings Surprises and the Persistence of Post-Announcement Drift (December 2000). Available at SSRN: https://ssrn.com/abstract=255603 or http://dx.doi.org/10.2139/ssrn.255603

W. Bruce Johnson (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-1048 (Phone)
319-335-1956 (Fax)

William Carleton Schwartz

University of Arizona - Department of Accounting ( email )

McClelland Hall 301 P.O. Box 210108
Tucson, AZ 85721
United States
520-621-4830 (Phone)
520-621-3742 (Fax)

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