Arbitrage Risk and Post-Earnings-Announcement Drift
Univ. of Notre Dame Department of Finance and Business Economics Working Paper
33 Pages Posted: 29 Oct 2002
Date Written: March 28, 2002
This study examines whether the magnitude of post-earnings-announcement drift is related to the risk faced by arbitrageurs who may view the anomaly as a trading opportunity. Consistent with this hypothesis, the magnitude of the drift is strongly related to the arbitrage risk measure developed by Wurgler and Zhuravskaya (2002). The effect of arbitrage risk is statistically and economically significant under a wide range of specifications. The results suggest that post-earnings-announcement drift represents an underreaction to earnings information and that arbitrage risk impedes arbitrageurs from eliminating it.
Keywords: Anomalies, Post-earnings-announcement drift, SUE effect, Arbitrage risk, Market Efficiency
JEL Classification: G14
Suggested Citation: Suggested Citation