Presidential Cycles in PEAD

Abstract

Post-earnings announcement drift (PEAD) displays presidential cycles: it earns 5.1% per year during Democratic presidencies but its profitability increases significantly to 16.8% during Republican presidencies. Survey-based evidence also indicates substantial underreaction to earnings news when the US president is Republican. The stronger underreaction likely arises from exposure to tax policy uncertainty. Consistently, we find that investor reactions to earnings announcements are much weaker for firms with greater exposure to tax policy uncertainty, particularly during Republican presidencies. This explanation accounts for the observed presidential cycles in PEAD, whereas existing explanations for PEAD cannot. The cycles are more pronounced among non-microcap firms.

Keywords: post-earnings announcement drift, presidential cycles, Republicans, Democrats, underreaction, earnings surprises, subjective expectation, tax policy uncertainty