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Post-earnings announcement drift and parameter uncertainty: evidence from industry and market news

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  • Claire Y. C. Liang

    (University of Maine)

  • Rengong Zhang

    (City University of Hong Kong)

Abstract

Post-earnings announcement drift (PEAD), one of the most prominent and robust return anomalies, is often attributed to investor naiveté or irrationality. A competing explanation is parameter uncertainty, which posits that PEAD may occur as rational investors encounter parameter uncertainty and must learn about the true values of a firm’s pricing parameters over time. This study extends the parameter uncertainty explanation for PEAD and hypothesizes that industry or market news arriving during the drift period affects drift strength. Consistent with our hypothesis, we find that the prices of high surprise firms show stronger responses to industry/market news in the drift period. Hence, the drift becomes stronger (weaker or reversed) when drift-period industry/market news agrees (disagrees) with a firm’s prior earnings news. The evidence helps to distinguish the parameter uncertainty theory from competing behavioral explanations based on investor naiveté or irrational biases, a task previous studies find difficult. Overall, our findings indicate that asset pricing anomalies need not imply investor irrationality—anomalies could arise from rational investors learning about pricing parameters over time.

Suggested Citation

  • Claire Y. C. Liang & Rengong Zhang, 2020. "Post-earnings announcement drift and parameter uncertainty: evidence from industry and market news," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 695-738, August.
    • Handle: RePEc:kap:rqfnac:v:55:y:2020:i:2:d:10.1007_s11156-019-00857-w
    DOI: 10.1007/s11156-019-00857-w
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    Cited by:

    1. Baochen Yang & Yifang Liu & Yunpeng Su, 2023. "Earnings communication conferences and post‐earnings‐announcement drift: Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2145-2185, June.

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    More about this item

    Keywords

    Post-earnings announcement drift; Earnings momentum; Anomaly; Parameter uncertainty; Rational learning;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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