Post-Earnings Announcement Drift and Systematic News

• In Event: Financial Accounting and Reporting 7

Abstract

Recent studies have found that post-earnings announcement drift (PEAD) is related to rational (Bayesian) learning and the business cycle. In this study, I hypothesize that in addition to investors learning about firm-level information, their learning about the state of the economy during the post-announcement period could have an effect on PEAD as well. PEAD should become stronger when systematic news in the post-announcement period agrees with a firm's prior earnings surprise and weaker otherwise. Using quarterly data of U.S. public firms from 1973Q1 to 2011Q3, I find empirical evidence that is consistent with the proposed hypothesis. The relation between PEAD and systematic news documented in the study is consistent with a rational learning explanation of PEAD but cannot be explained by investor underreaction to past firm earnings news, the commonly accepted explanation for PEAD.

Author

• Claire Liang, University of Alberta