A New Perspective on Post‐Earnings‐Announcement‐Drift: Using a Relative Drift Measure

21 Pages Posted: 27 May 2020

See all articles by Michael Clement

Michael Clement

University of Texas at Austin

Joonho Lee

California State Polytechnic University, Pomona - Accounting Department

Kevin Ow Yong

Singapore Institute of Technology

Date Written: October/November 2019

Abstract

Prior research finds that there is a delayed reaction to both analyst‐based earnings surprises and random‐walk‐based earnings surprises. Focusing on the market reaction from the post‐announcement window, prior studies show that analyst‐based drift is larger than random walk‐based drift. This finding is counter‐intuitive if we believe large, sophisticated investors tend to trade on analysts’ forecast earnings news and thus react faster and more completely than smaller and less sophisticated investors react to random walk earnings news. In this study, we construct a relative measure of post‐earnings‐announcement drift (PEAD) (i.e., drift as a proportion of total market reaction to earnings news) which we refer to as the ‘drift ratio’, and we provide evidence, consistent with our intuition, that analyst‐based drift ratio is smaller (not greater) than random‐walk‐based drift ratio. We find that this difference is more pronounced in more recent periods and for firms with more sophisticated investors. Our approach to measure the PEAD is more intuitive than that in traditional PEAD literature. Our results thus complement existing research findings by utilizing the drift ratio measure to generate new insights about the drift phenomenon.

Keywords: analyst‐based earnings surprise, anomalies, information uncertainty, post‐earnings‐announcement drift, random‐walk‐based earnings surprise

JEL Classification: D82, G14, M41

Suggested Citation

Clement, Michael and Lee, Joonho and Yong, Kevin Ow, A New Perspective on Post‐Earnings‐Announcement‐Drift: Using a Relative Drift Measure (October/November 2019). Journal of Business Finance & Accounting, Vol. 46, Issue 9-10, pp. 1123-1143, 2019, Available at SSRN: https://ssrn.com/abstract=3604489 or http://dx.doi.org/10.1111/jbfa.12401

Michael Clement (Contact Author)

University of Texas at Austin

2317 Speedway
Austin, TX 78712
United States

Joonho Lee

California State Polytechnic University, Pomona - Accounting Department ( email )

College of Business Administration
Pomona, CA 91768
United States
9098694597 (Phone)

Kevin Ow Yong

Singapore Institute of Technology

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
325
PlumX Metrics