Post-Earnings-Announcement Drift: Expected Growth Risk or Limits-to-Arbitrage?

62 Pages Posted: 7 Feb 2020

See all articles by Dongcheol Kim

Dongcheol Kim

Korea University Business School

Deok-Hyeon Lee

Korea Development Bank

Byoung-Kyu Min

Hanyang University

Date Written: October 15, 2019


To explain post-earnings-announcement drift (PEAD), we suggest expected growth risk, which is measured as covariance between stock returns and expected future real GDP growth rates. We find that both expected growth rates and expected growth risk increase with standardized unexpected earnings, and expected growth risk is significantly priced in the cross-section of returns. The model including expected growth risk alone explains PEAD satisfactorily. We also find that after adjustment for expected growth risk, the systematic relation of PEAD with the degree of limits-to-arbitrage disappears. This indicates that the empirical evidence supporting the mispricing hypothesis due to limits-to-arbitrage is a consequence of the failure in incorporating appropriate risk and the drift is a manifestation of expected growth risk.

Keywords: Post-earnings-announcement drift, Expected growth risk, Expected real GDP growth, Limits-to-arbitrage, Pricing errors

JEL Classification: G12, G14

Suggested Citation

Kim, Dongcheol and Lee, Deok-Hyeon and Min, Byoung-Kyu, Post-Earnings-Announcement Drift: Expected Growth Risk or Limits-to-Arbitrage? (October 15, 2019). Available at SSRN: or

Dongcheol Kim (Contact Author)

Korea University Business School ( email )

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

Deok-Hyeon Lee

Korea Development Bank ( email )

16-3 Yeouido-Dong, Yeongdeungpo-Gu
Seoul, 150-973
Korea, Republic of (South Korea)

Byoung-Kyu Min

Hanyang University ( email )

Korea, Republic of (South Korea)

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