Opinion Divergence and Post-Earnings Announcement Drift

47 Pages Posted: 13 Mar 2007

See all articles by Kirsten L. Anderson

Kirsten L. Anderson

Georgetown University - Department of Accounting and Business Law

Jeffrey H. Harris

American University - Department of Finance and Real Estate

Eric C. So

Nasdaq, Inc. - Economic Research

Date Written: March 8, 2007

Abstract

This paper examines the relationship between divergent opinions and post-earnings announcement drift. We provide an improved measure of opinion divergence constructed from the dispersion of order flow across Nasdaq market makers that captures the breadth of divergence that is lost by volume-based measures. We find evidence that both limited participation (in the form of delayed price reaction and short sale constraints) and divergent opinions contribute significantly to drift. We also find that earnings surprises induce permanent upward shifts in opinion divergence, trading volume, and return volatility that last up to nine months following the announcement. Our results suggest that opinion divergence elicits added risk in the form of increased volatility with the resulting returns comprising a component of drift. We document that daily opinion divergence is a priced risk factor over the nine month drift period. The persistence of these relationships suggests that opinion divergence represents a fundamental change in the market's assessment of the announcing firm that extends beyond the announcement period and influences post-announcement stock returns.

Keywords: Opinion Divergence, Post-earnings announcement drift, Risk, Volume, Volatility

JEL Classification: G12, G14, M41, D82

Suggested Citation

Anderson, Kirsten L. and Harris, Jeffrey H. and So, Eric C., Opinion Divergence and Post-Earnings Announcement Drift (March 8, 2007). Available at SSRN: https://ssrn.com/abstract=969736 or http://dx.doi.org/10.2139/ssrn.969736

Kirsten L. Anderson

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-3798 (Phone)
202-687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/kirsten-anderson

Jeffrey H. Harris (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)

Eric C. So

Nasdaq, Inc. - Economic Research ( email )

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