Arbitrage Risk and Post-Earnings-Announcement Drift

Mendenhall, Richard R.

doi:10.2139/ssrn.315243

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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

See all articles by Richard R. Mendenhall

Richard R. Mendenhall

University of Notre Dame - Department of Finance

There are 2 versions of this paper

Date Written: March 28, 2002

Abstract

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

Mendenhall, Richard R., Arbitrage Risk and Post-Earnings-Announcement Drift (March 28, 2002). Univ. of Notre Dame Department of Finance and Business Economics Working Paper, Available at SSRN: https://ssrn.com/abstract=315243 or http://dx.doi.org/10.2139/ssrn.315243