Post Earnings Announcement Drift: More Risk than Investors can Bear
AbstractThis paper shows how post earnings announcement drift may arise in a capital market with rational investors if the firm's earnings in consecutive periods are positively correlated and there is a fixed supply of the firm's shares.This result is driven by the fact that equilibrium share prices depend on the forward looking information contained in current earnings and the amount of risk that the fixed supply of shares imposes on the investors.If the latter is sufficiently large, share prices will be relatively rigid with respect to the forward looking information contained in current earnings.Hence, good (bad) news yields an increase (decrease) in the equilibrium price that is too small compared to the information that is released in the earnings announcement, so that positive (negative) abnormal returns are likely to occur again in the next period.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-45.
Date of creation: 2002
Date of revision:
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earnings per share; capital markets; investment;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-05-15 (All new papers)
- NEP-CFN-2003-05-15 (Corporate Finance)
- NEP-FMK-2003-05-15 (Financial Markets)
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