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Firm complexity and post-earnings announcement drift

Author

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  • Alexander Barinov

    (University of California Riverside)

  • Shawn Saeyeul Park

    (Yonsei University)

  • Çelim Yıldızhan

    (Koç University)

Abstract

We show that the post-earnings announcement drift (PEAD) is stronger for conglomerates than single-segment firms. Conglomerates, on average, are larger than single segment firms, so it is unlikely that limits-to-arbitrage drive the difference in PEAD. Rather, we hypothesize that market participants find it more costly and difficult to understand firm-specific earnings information regarding conglomerates, as they have more complicated business models than single-segment firms. This in turn slows information processing about them. In support of our hypothesis, we find that, compared to single-segment firms with similar firm characteristics, conglomerates have relatively low institutional ownership and short interest, are covered by fewer analysts, and these analysts have less industry expertise and make larger forecast errors. Finally, we find that an increase in organizational complexity leads to larger PEAD and document that more complicated conglomerates have even greater PEAD. Our results are robust to an extensive list of alternative explanations of PEAD as well as alternative measures of firm complexity.

Suggested Citation

  • Alexander Barinov & Shawn Saeyeul Park & Çelim Yıldızhan, 2024. "Firm complexity and post-earnings announcement drift," Review of Accounting Studies, Springer, vol. 29(1), pages 527-579, March.
    • Handle: RePEc:spr:reaccs:v:29:y:2024:i:1:d:10.1007_s11142-022-09727-8
    DOI: 10.1007/s11142-022-09727-8
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    Cited by:

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    2. repec:grz:wpsses:2020-04 is not listed on IDEAS
    3. Cathy Xuying Cao & Chongyang Chen & Ekaterina E. Emm & Bo Han, 2022. "Corporate diversification and seasoned equity offering performance," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 581-614, February.
    4. Narongdech Thakerngkiat & Hung T. Nguyen & Nhut H. Nguyen & Nuttawat Visaltanachoti, 2021. "Do accounting information and market environment matter for cross‐asset predictability?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4389-4434, September.
    5. Sharad Asthana & Rachana Kalelkar, 2020. "Impact of economic policy uncertainty on disclosure and pricing of earnings news," Review of Quantitative Finance and Accounting, Springer, vol. 55(4), pages 1481-1512, November.
    6. Jaewon Choi & Linh Thompson & Jared Williams, 2019. "Asymmetric Learning from Prices and Post‐Earnings‐Announcement Drift," Contemporary Accounting Research, John Wiley & Sons, vol. 36(3), pages 1724-1750, September.

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    More about this item

    Keywords

    Organizational complexity; Post-earnings-announcement drift; Conglomerates; Complicated firms; Firm complexity and post-earnings-announcement drift;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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