35 Pages Posted: 20 Mar 2007 Last revised: 24 Aug 2011
Date Written: March 8, 2007
The post-earnings-announcement-drift is a long standing anomaly that is in conflict with market efficiency. This paper documents that the post-earnings-announcement drift occurs mainly in the highly illiquid stocks. A trading strategy that goes long the high earnings surprise stocks and short the low earnings surprise stocks provides a value-weighted return of 0.14% in the most liquid stocks and 1.60% per month in the most illiquid stocks. The illiquid stocks have high trading costs and market impact costs. Using a multitude of estimates we find that transaction costs account for anywhere from 63% to 100% of the paper profits from the long-short strategy designed to exploit the earnings momentum anomaly. This paper provides support for the argument that transactions costs could be the source of the drift.
Keywords: G11, G12, C11
Suggested Citation: Suggested Citation
Chordia, Tarun and Sadka, Ronnie and Goyal, Amit and Sadka, Gil and Shivakumar, Lakshmanan, Liquidity and the Post-Earnings-Announcement Drift (March 8, 2007). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=972758 or http://dx.doi.org/10.2139/ssrn.972758
By Ronnie Sadka
By Meb Faber