Earnings Announcement Premia and the Limits to Arbitrage

50 Pages Posted: 4 Jan 2005

See all articles by Daniel A. Cohen

Daniel A. Cohen

Texas A&M University College Station

Aiyesha Dey

Harvard Business School

Thomas Z. Lys

Northwestern University - Kellogg School of Management

Shyam V. Sunder

University of Arizona - Department of Accounting

Multiple version iconThere are 3 versions of this paper

Date Written: December 29, 2004

Abstract

We document that earnings announcement-day premia persist beyond the sample period of earlier studies, over different disclosure environments and remain robust to the refinement of using the expected announcement day rather than the actual announcement day. A portfolio of announcing firms yields returns in excess of the corresponding risk. Excluding announcers from a well-diversified portfolio, while reducing the standard deviation of that portfolio, also reduces its Sharpe ratio, indicating that this strategy results in a less favorable risk-return trade-off. Finally, we provide evidence that the premia are dramatically reduced when the announcement risk is reduced through preannouncements. In addition, we document that the continued presence of this premia is likely to result from limits to arbitrage. These findings are consistent with the view that the announcement period returns are likely to represent compensation for announcement risk.

Keywords: Earnings announcements, risk, diversification, risk-return tradeoff, limits to arbitrage

JEL Classification: G12, G14, M41, M45

Suggested Citation

Cohen, Daniel A. and Dey, Aiyesha and Lys, Thomas Z. and Sunder, Shyam, Earnings Announcement Premia and the Limits to Arbitrage (December 29, 2004). Available at SSRN: https://ssrn.com/abstract=642045 or http://dx.doi.org/10.2139/ssrn.642045

Daniel A. Cohen

Texas A&M University College Station

Department of Accounting
College Station, TX 77843
United States

Aiyesha Dey

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Thomas Z. Lys (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)

Shyam Sunder

University of Arizona - Department of Accounting ( email )

210 L McClelland Hall
1130 E Helen St
Tucson, AZ 85721
United States

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