Post-Earnings Announcement Drift: Timing and Liquidity Costs

40 Pages Posted: 23 Oct 2006

See all articles by Robert H. Battalio

Robert H. Battalio

University of Notre Dame - Department of Finance

Richard R. Mendenhall

University of Notre Dame - Department of Finance

Date Written: 2007

Abstract

The persistence of the post-earnings announcement drift leads many to believe that trading barriers prevent knowledgeable investors from eliminating it. For example, Bhushan (1994) contends that sophisticated investors quickly drive prices to within trading costs of efficient values. We examine two factors not previously addressed in the literature: the exact timing of the announcements and liquidity costs. Specifically, we compare the profits generated by transacting immediately following the announcement and at the close of the actual announcement day to the common practices of assuming trades at the close on the Compustat date or the following day. We further investigate the impact of liquidity costs on the drift by examining actual quotes available to investors. Under a wide range of timing and cost assumptions our results leave little doubt that between 1993 and 2002 an investor could have earned hedged-portfolio returns of at least 14% per year after trading costs.

Keywords: Earnings, Post-earnings announcement drift, Anomalies, Bid-Ask Spread, Market microstructure

JEL Classification: G14, M41

Suggested Citation

Battalio, Robert H. and Mendenhall, Richard R., Post-Earnings Announcement Drift: Timing and Liquidity Costs (2007). Available at SSRN: https://ssrn.com/abstract=937257 or http://dx.doi.org/10.2139/ssrn.937257

Robert H. Battalio

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)

Richard R. Mendenhall (Contact Author)

University of Notre Dame - Department of Finance ( email )

330 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6076 (Phone)
574-631-5255 (Fax)

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