Post earnings announcement drift
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Post–earnings announcement drift, or PEAD (also named as SUE effect) is the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks (even several months) following an earnings announcement.
The phenomenon can be explained with a number of hypotheses. The most widely accepted explanation for the effect is investor under-reaction to earnings announcements.
This was initially proposed by the information content study of R. Ball & P. Brown, 'An empirical evaluation of accounting income numbers', Journal of Accounting Research, Autumn 1968, pp. 159-178. As one of major earnings anomalies, which against the market efficiency theory, PEAD has become one of the robust topics in financial market literature.
Bernard & Thomas (1989)[1] and Bernard (1990)[2] provided a comprehensive PEAD research. According to Bernard & Thomas (1990), PEAD patterns can be viewed as including two components. The first component is a positive autocorrelation between seasonal difference (i.e., seasonal random walk forecast errors – the difference between the actual returns and forecasted returns) that is strongest for adjacent quarters, being positive over the first three lag quarters. Second, there is a negative auto correlation between seasonal differences that of the fourth quarters apart.
[edit] References
- ^ Bernard, V. L., & Thomas, J. K. (1989). Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium? Journal of Accounting Research, 27, 1-36.
- ^ Bernard, V. L., & Thomas, J. K. (1990). Evidence that stock prices do not fully reflect the implications of current earnings for future earnings. Journal of Accounting and Economics, 13(4), 305-340
- Do Individual Investors Drive Post Earnings Announcement Drift? OSU Finance Working Paper
Bernard, V. L., & Thomas, J. K. (1989). Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium? Journal of Accounting Research, 27, 1-36.
Bernard, V. L., & Thomas, J. K. (1990). Evidence that stock prices do not fully reflect the implications of current earnings for future earnings. Journal of Accounting and Economics, 13(4), 305-340.
