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Objective estimation versus subjective perceptions of earnings patterns and post-earnings-announcement drift

Author

Listed:
  • Allen W. Bathke Jr.
  • Richard M. Morton
  • Matthew Notbohm
  • Tianming Zhang
  • Steven Cahan

Abstract

type="main" xml:id="acfi12012-abs-0001"> We investigate how the market's subjective estimates of autocorrelation in quarterly earnings vary with objective time-series estimates. Our results suggest that investors increasingly underestimate the correlation as the autocorrelation level increases, and as a result, the post-earnings-announcement drift (PEAD) increases with the level of autocorrelation. We further show that the ability of autocorrelation to explain variation in the PEAD is robust to alternative explanations based on risk and institutional factors. Additional analysis indicates that the market's inefficiency in assessing the existence and magnitude of autocorrelation (and the related impact on PEAD) is inversely related to the richness of the information environment.

Suggested Citation

  • Allen W. Bathke Jr. & Richard M. Morton & Matthew Notbohm & Tianming Zhang & Steven Cahan, 2014. "Objective estimation versus subjective perceptions of earnings patterns and post-earnings-announcement drift," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(2), pages 305-334, June.
    • Handle: RePEc:bla:acctfi:v:54:y:2014:i:2:p:305-334
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    File URL: http://hdl.handle.net/10.1111/acfi.2014.54.issue-2
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    Cited by:

    1. Jonnergård, Karin & von Koch, Christopher & Nilsson, Ola, 2020. "Information environment – An exploration and clarification of the concept based on prior literature," Advances in accounting, Elsevier, vol. 50(C).
    2. Fink, Josef, 2021. "A review of the Post-Earnings-Announcement Drift," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    3. repec:grz:wpsses:2020-03 is not listed on IDEAS
    4. Fink, Josef & Palan, Stefan & Theissen, Erik, 2020. "Earnings autocorrelation and the post-earnings-announcement drift: Experimental evidence," CFR Working Papers 20-10, University of Cologne, Centre for Financial Research (CFR).
    5. repec:grz:wpsses:2020-04 is not listed on IDEAS

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