A Multi-factor Explanation of Post-Earnings-Announcement Drift

16 Pages Posted: 9 Nov 2018

See all articles by Dongcheol Kim

Dongcheol Kim

Korea University Business School

Myungsun Kim

SUNY at Buffalo

Date Written: June 3, 2003


To explain post-earnings announcement drift, we construct a risk factor related to unexpected earnings surprise, and propose a four-factor model by adding this risk factor to Fama and French’s (1993), (1995) three-factor model. This earnings surprise risk factor provides a remarkable improvement in explaining post-earnings announcement drift when included in addition to the three factors of Fama and French. After adjusting raw returns for the four risk factors, the cumulative abnormal returns over the 60 trading days subsequent to quarterly earnings announcements are economically and statistically insignificant. Furthermore, except for the first two days after the earnings announcement, the cumulative abnormal returns and the arbitrage returns from our four-factor model are relatively stable over the testing period and never significant on any day of the testing period. On the other hand, the arbitrage returns from the other models increase over the 60-day testing period. We argue that most of the post-earnings announcement drift observed in prior studies may be a result of using misspecified models and failing to appropriately adjust raw returns for risk.

Keywords: post-earnings-announcement drift, risk factors, unexpected earnings surprise, abnormal stock returns

JEL Classification: G12, G14

Suggested Citation

Kim, Dongcheol and Kim, Myungsun, A Multi-factor Explanation of Post-Earnings-Announcement Drift (June 3, 2003). Journal of Financial and Quantitative Analysis (JFQA), Vol. 34, No. 2, 2003, Available at SSRN: https://ssrn.com/abstract=3267792

Dongcheol Kim (Contact Author)

Korea University Business School ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
+82-2-3290-2606 (Phone)

Myungsun Kim

SUNY at Buffalo ( email )

Buffalo, NY 14260
United States
716-645-7900 (Phone)

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