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Firm Complexity and Post-Earnings-Announcement Drift

Author

Listed:
  • Barinov, Alexander
  • Park, Shawn Saeyeul
  • Yildizhan, Celim

Abstract

The paper shows that the post earnings announcement drift is stronger for conglomerates, despite conglomerates being larger, more liquid, and more actively researched by investors. We attribute this finding to slower information processing about complex firms and show that the post earnings announcement drift is positively related to measures of conglomerate complexity. We also find that the post earnings announcement drift is stronger for new conglomerates than it is for existing conglomerates and that investors are most confused about complicated firms that expand from within rather than firms that diversify into new business segments via mergers and acquisitions.

Suggested Citation

  • Barinov, Alexander & Park, Shawn Saeyeul & Yildizhan, Celim, 2014. "Firm Complexity and Post-Earnings-Announcement Drift," MPRA Paper 53887, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:53887
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    File URL: https://mpra.ub.uni-muenchen.de/71015/4/MPRA_paper_71015.pdf
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    References listed on IDEAS

    as
    1. X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, February.
    2. Lesmond, David A. & Schill, Michael J. & Zhou, Chunsheng, 2004. "The illusory nature of momentum profits," Journal of Financial Economics, Elsevier, vol. 71(2), pages 349-380, February.
    3. Daniel, Kent, et al, 1997. " Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-1058, July.
    4. Charles M.C. Lee & Bhaskaran Swaminathan, 2000. "Price Momentum and Trading Volume," Journal of Finance, American Finance Association, vol. 55(5), pages 2017-2069, October.
    5. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    6. Shane A. Corwin & Paul Schultz, 2012. "A Simple Way to Estimate Bidā€Ask Spreads from Daily High and Low Prices," Journal of Finance, American Finance Association, vol. 67(2), pages 719-760, April.
    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    8. Joel Hasbrouck, 2009. "Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data," Journal of Finance, American Finance Association, vol. 64(3), pages 1445-1477, June.
    9. Roll, Richard, 1984. " A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    10. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    post-earnings-announcement drift; conglomerates; mispricing; limits to arbitrage; complicated firms;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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