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Post earnings announcement drift: A simple earnings surprise measure, the medium effect of investor attention and investing strategy

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  • Lan, Qiujun
  • Xie, Yuxuan
  • Mi, Xianhua
  • Zhang, Chunyu

Abstract

Drifting in the direction of earnings surprises for a prolonged period is a decades-puzzling financial anomaly, i.e., the “post-earnings-announcement drift” (PEAD). This paper provided a new simple but effective measure of earnings surprise called ORJ. Based on ORJ, not only is the medium effect of investors' attention on the relationship between earnings surprises and PEAD analyzed but also a tractable and profitable investing strategy is provided. Through comprehensive empirical analysis of the Chinese stock market, we found that i) both earnings surprises and investor attention can increase the degree of PEAD; ii) “good” (bad) earnings surprises strengthen (weaken) the degree of drift by accumulating (decreasing) investor attention; but it is asymmetric that the positive effects of “good” earnings surprises are stronger than the negative effects of “bad” earnings surprises on PEAD; and iii) the strategy obtains an average 6.78% return per quarter in excess of the market but only needs longing dozens of stocks; iv) Typical pricing factors such as the Fama-French three factors, illiquidity and company characteristics have little explanatory power to the returns of the strategy. This paper strongly demonstrates the importance of monitoring overnight returns of earnings announcements to digging the unexpected information and the potential profitability of PEAD in the Chinese market.

Suggested Citation

  • Lan, Qiujun & Xie, Yuxuan & Mi, Xianhua & Zhang, Chunyu, 2024. "Post earnings announcement drift: A simple earnings surprise measure, the medium effect of investor attention and investing strategy," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003922
    DOI: 10.1016/j.irfa.2024.103460
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