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Liquidity and the Post-Earnings-Announcement Drift

35 Pages Posted: 20 Mar 2007 Last revised: 24 Aug 2011

Tarun Chordia

Emory University - Department of Finance

Ronnie Sadka

Boston College - Carroll School of Management

Amit Goyal

University of Lausanne; Swiss Finance Institute

Gil Sadka

University of Texas at Dallas

Lakshmanan Shivakumar

London Business School

Multiple version iconThere are 3 versions of this paper

Date Written: March 8, 2007

Abstract

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

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

Tarun Chordia (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Amit Goyal

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Gil Sadka

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Lakshmanan Shivakumar

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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