Liquidity and the Post-Earnings-Announcement Drift

The post-earnings-announcement drift is a long-standing anomaly that conflicts with market efficiency. This study documents that the post-earnings-announcement drift occurs mainly in highly illiquid stocks. A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surpri...

Full description

Saved in:
Bibliographic Details
Published in:Financial analysts journal 2009-07, Vol.65 (4), p.18-32
Main Authors: Chordia, Tarun, Goyal, Amit, Sadka, Gil, Sadka, Ronnie, Shivakumar, Lakshmanan
Format: Article
Language:English
Subjects:
Arbitrage
Business structures
Cost analysis
Cost estimates
Earnings
Efficiency
Efficient markets
Equity Investments
Financial economics
Financial information
Financial portfolios
Growth stocks
Investment policy
Liquidity
Liquids
Market efficiency
News
Price formation
Price momentum
Prices
Profitability
Profits
Rates of return
Regression analysis
Securities trading
Standard deviation
Stock exchange
Stock exchanges
Stock prices
Studies
Transaction costs
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The post-earnings-announcement drift is a long-standing anomaly that conflicts with market efficiency. This study documents that the post-earnings-announcement drift occurs mainly in highly illiquid stocks. A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a monthly value-weighted return of 0.04 percent in the most liquid stocks and 2.43 percent in the most illiquid stocks. The illiquid stocks have high trading costs and high market impact costs. By using a multitude of estimates, the study finds that transaction costs account for 70-100 percent of the paper profits from a long-short strategy designed to exploit the earnings momentum anomaly.
ISSN:0015-198X
1938-3312
DOI:10.2469/faj.v65.n4.3