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The profitability, costs and systematic risk of the post-earnings-announcement-drift trading strategy

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  • Qi Zhang
  • Charlie Cai
  • Kevin Keasey

Abstract

This paper re-examines the profitability of the post-earnings-announcement-drift (PEAD) trading strategy using a practical simulation approach that aligns with a fund manager’s investment perspective. It allows us to calculate the break-even transaction costs of following a PEAD strategy, and permits the explicit incorporation of transaction costs. Using US data from 1974 to 2007, we show that the traditional event-study method understates the risk and overstates the abnormal return of the PEAD strategy. Accounting for transaction costs in a practical simulation framework, we show there is no abnormal return (alpha) from the PEAD strategy in multi-factor asset pricing regression analyses. These results are robust to sub-period analyses and alternative transaction cost measures. The effects of intraday timing and information risk on the PEAD strategy are also explored. Overall, our study shows that the practical aspects of implementing the PEAD strategy are vitally important to evaluating the risk and return of the strategy. We provide a practical, analytical tool that can be directly adopted by fund managers to study the PEAD strategy with their institutional parameters of transaction costs and market timing. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Qi Zhang & Charlie Cai & Kevin Keasey, 2014. "The profitability, costs and systematic risk of the post-earnings-announcement-drift trading strategy," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 605-625, October.
    • Handle: RePEc:kap:rqfnac:v:43:y:2014:i:3:p:605-625
    DOI: 10.1007/s11156-013-0386-4
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    References listed on IDEAS

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    Cited by:

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    2. McGuinness, Paul B., 2016. "Voluntary profit forecast disclosures, IPO pricing revisions and after-market earnings drift," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 70-83.
    3. Paul Brockman & Dennis Y. Chung & Kenneth W. Shaw, 2017. "The R&D-abnormal return anomaly: a transaction cost explanation," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 385-406, February.

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    More about this item

    Keywords

    Post earnings announcement drift; Trading strategy; Efficient market hypothesis; Simulation approach; Transaction costs; G11; G12; G14;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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