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Information Uncertainty and Post‐Earnings‐Announcement‐Drift

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  • Jennifer Francis
  • Ryan Lafond
  • Per Olsson
  • Katherine Schipper

Abstract

We examine whether rational investor responses to information uncertainty (IU) explain properties of and returns to the post‐earnings‐announcement‐drift (PEAD) trading anomaly. Consistent with a rational learning explanation, we find that: (1) unexpected earnings (UE) signals that are characterized as having greater IU have more muted initial market reactions; (2) extreme UE portfolios are characterized by securities with higher IU than non‐extreme UE portfolios; and (3) within the extreme UE portfolios, high IU securities are more prevalent and earn larger abnormal returns than low IU securities. Further tests show that prior evidence of greater PEAD profitability for higher idiosyncratic volatility securities is explained by the greater information uncertainty associated with these securities.

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  • Jennifer Francis & Ryan Lafond & Per Olsson & Katherine Schipper, 2007. "Information Uncertainty and Post‐Earnings‐Announcement‐Drift," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3‐4), pages 403-433, April.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:3-4:p:403-433
    DOI: 10.1111/j.1468-5957.2007.02030.x
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    Cited by:

    1. Jon Kerr & Gil Sadka & Ronnie Sadka, 2020. "Illiquidity and Price Informativeness," Management Science, INFORMS, vol. 66(1), pages 334-351, January.
    2. repec:grz:wpsses:2020-03 is not listed on IDEAS
    3. Pervaiz Alam & Xiaoling Pu & Barry Hettler & Hai Lin, 2020. "The pricing of accruals quality in credit default swap spreads," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 1943-1977, September.
    4. Marek Sojka, 2021. "PEAD na polskim rynku akcji," Bank i Kredyt, Narodowy Bank Polski, vol. 52(2), pages 143-166.
    5. 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).
    6. repec:grz:wpsses:2020-04 is not listed on IDEAS
    7. DeLisle, R. Jared & Ferguson, Michael F. & Kassa, Haimanot & Zaynutdinova, Gulnara R., 2021. "Hazard stocks and expected returns," Journal of Banking & Finance, Elsevier, vol. 125(C).
    8. Zhipeng Yan & Yan Zhao & Wei Xu & Lee-Young Cheng, 2012. "Earnings response elasticity and post-earnings-announcement drift," Journal of Asset Management, Palgrave Macmillan, vol. 13(4), pages 287-305, August.
    9. Bannigidadmath, Deepa & Narayan, Paresh Kumar, 2021. "Economic news and the cross-section of commodity futures returns," Journal of Behavioral and Experimental Finance, Elsevier, vol. 31(C).
    10. Linda H. Chen & Wei Huang & George J. Jiang & Kevin X. Zhu, 2022. "Why do investors discount earnings announced late?," Review of Quantitative Finance and Accounting, Springer, vol. 58(3), pages 977-1014, April.
    11. Zhang, Sijia & Gregoriou, Andros, 2020. "Post earnings announcement drift, liquidity and zero leverage firms: Evidence from the UK stock market," Journal of Business Research, Elsevier, vol. 116(C), pages 13-26.
    12. Fink, Josef, 2021. "A review of the Post-Earnings-Announcement Drift," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    13. Claire Y. C. Liang & Rengong Zhang, 2020. "Post-earnings announcement drift and parameter uncertainty: evidence from industry and market news," Review of Quantitative Finance and Accounting, Springer, vol. 55(2), pages 695-738, August.
    14. Haggard, K. Stephen & Howe, John S. & Lynch, Andrew A., 2015. "Do baths muddy the waters or clear the air?," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 105-117.
    15. Johnstone, David, 2022. "Accounting research and the significance test crisis," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 89(C).
    16. Yifan Li & Alexander Nekrasov & Siew Hong Teoh, 2020. "Opportunity knocks but once: delayed disclosure of financial items in earnings announcements and neglect of earnings news," Review of Accounting Studies, Springer, vol. 25(1), pages 159-200, March.
    17. Qian Chen & Xiang Gao & Gangchen Liu, 2021. "Limited Attention and Post-Earnings Announcement Drift: Evidence from China s Stock Market," International Journal of Economics and Financial Issues, Econjournals, vol. 11(1), pages 1-17.
    18. Figlioli, Bruno & Lemes, Sirlei & Lima, Fabiano Guasti, 2020. "In search for good news: The relationship between accounting information, bounded rationality and hard-to-value stocks," Emerging Markets Review, Elsevier, vol. 44(C).
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