Information Uncertainty and Post-Earnings-Announcement-Drift

31 Pages Posted: 4 Jun 2007

See all articles by Jennifer Francis

Jennifer Francis

Duke University

Ryan LaFond

Algert Global, LLC

Per Olsson

Duke University

Katherine Schipper

Duke University - Fuqua School of Business

Abstract

We examine whether rational investor responses to information uncertainty (IU) explain properties of and returns to the post-earnings-announcement-drift (PEAD) trading anomaly. Consistent with a rational learning explanation, we find that: (1) unexpected earnings (UE) signals that are characterized as having greater IU have more muted initial market reactions; (2) extreme UE portfolios are characterized by securities with higher IU than non-extreme UE portfolios; and (3) within the extreme UE portfolios, high IU securities are more prevalent and earn larger abnormal returns than low IU securities. Further tests show that prior evidence of greater PEAD profitability for higher idiosyncratic volatility securities is explained by the greater information uncertainty associated with these securities.

JEL Classification: G12, G14, M41, D82

Suggested Citation

Francis, Jennifer and LaFond, Ryan and Olsson, Per Mikael and Schipper, Katherine, Information Uncertainty and Post-Earnings-Announcement-Drift. Journal of Business Finance & Accounting, Vol. 34, No. 3-4, pp. 403-433, April/May 2007. Available at SSRN: https://ssrn.com/abstract=990910 or http://dx.doi.org/10.1111/j.1468-5957.2007.02030.x

Jennifer Francis

Duke University ( email )

Fuqua School of Business
Durham, NC 27708
United States
919-660-7817 (Phone)
919-648-2818 (Fax)

Ryan LaFond

Algert Global, LLC ( email )

One Maritime Plaza
Suite 1525
San Francisco, CA 94111
United States

Per Mikael Olsson (Contact Author)

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States

Katherine Schipper

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

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