Do Institutional Investors Exploit the Post-Earnings Announcement Drift?

47 Pages Posted: 21 Oct 2003

See all articles by Bin Ke

Bin Ke

National University of Singapore

Santhosh Ramalingegowda

University of Georgia - Terry College of Business

Date Written: February 2004

Abstract

We provide evidence that transient institutional investors (i.e., those actively trading to maximize short term profits) trade to exploit the post-earnings announcement drift (PEAD). We estimate that transient institutions' arbitrage generates an abnormal return of 5.1 percent (or 22 percent annualized) after transaction costs. In addition, their arbitrage trades accelerate the speed that stock prices reflect the implications of current earnings for future earnings. However, transient institutions trade less aggressively to exploit PEAD in firms with high transaction costs. Our results contribute to understanding the role of transient institutional investors in explaining the persistence of PEAD.

JEL Classification: G12, G14, M41

Suggested Citation

Ke, Bin and Ramalingegowda, Santhosh, Do Institutional Investors Exploit the Post-Earnings Announcement Drift? (February 2004). Available at SSRN: https://ssrn.com/abstract=446520 or http://dx.doi.org/10.2139/ssrn.446520

Bin Ke (Contact Author)

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-53
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

Santhosh Ramalingegowda

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States
706-542-3612 (Phone)

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