The Post-Earnings-Announcement Drift and Liquidity Risk

41 Pages Posted: 19 Jan 2004

See all articles by Gil Sadka

Gil Sadka

University of Texas at Dallas

Ronnie Sadka

Boston College - Carroll School of Management

Date Written: June 7, 2004

Abstract

This paper investigates the relation between the post-earnings-announcement drift anomaly and liquidity. First, we find that, on average, bad-news firms (low standardized unexpected earnings (SUE)) are less liquid than good-news firms (high SUE), reflecting more information asymmetry and/or uncertainty among bad-news firms. Yet, we argue that this liquidity spread is less likely to explain the drift. Second, the returns of SUE-sorted portfolios are sensitive to fluctuations in market-wide liquidity. We find that systematic liquidity risk is an important determinant in explaining the cross-sectional variation of expected returns among SUE-sorted portfolios. This implies that a substantial part of the post-earnings-announcement drift anomaly can be viewed as compensation for risk associated with shocks to the information environment in the economy. Therefore, the evidence suggests that the previously reported anomalous returns are associated with model misspecification and/or hidden transaction costs.

Keywords: Post-Earnings-Announcement Drift, Liquidity Risk, Market Efficiency, Asset Pricing, SUE, Information Uncertainty

JEL Classification: G12, G14, M41

Suggested Citation

Sadka, Gil and Sadka, Ronnie, The Post-Earnings-Announcement Drift and Liquidity Risk (June 7, 2004). Available at SSRN: https://ssrn.com/abstract=487421 or http://dx.doi.org/10.2139/ssrn.487421

Gil Sadka

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Ronnie Sadka (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
832
rank
27,481
Abstract Views
3,761
PlumX Metrics