An informational efficiency perspective on the post-earnings announcement drift

Abstract This paper presents evidence indicating that the magnitude of the post-earnings-announcement drift is positively related to the direct and indirect costs of trading. Share price and annual dollar trading volume are chosen to proxy for the inverse of direct and indirect costs of trading, respectively. Drift is found to be inversely related to both these variables and these relations subsume the previously documented inverse relation between drift and firm size. The paper's evidence suggests that transactions costs are an important determinant of the efficiency of capital markets.

[1]  Victor L. Bernard,et al.  CROSS-SECTIONAL DEPENDENCE AND PROBLEMS IN INFERENCE IN MARKET-BASED ACCOUNTING RESEARCH , 1987 .

[2]  E. Fama.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[3]  R. Freeman,et al.  The Multiperiod Information-Content Of Accounting Earnings - Confirmations And Contradictions Of Previous Earnings Reports , 1989 .

[4]  Sanford J. Grossman,et al.  Information and Competitive Price Systems , 1976 .

[5]  Anat R. Admati,et al.  A Theory of Intraday Patterns: Volume and Price Variability , 1988 .

[6]  Richard R. Mendenhall.  Evidence on the Possible Underweighting of Earnings-Related Information , 1991 .

[7]  S. Penman.  Abnormal returns to investment strategies based on the timing of earnings reports , 1984 .

[8]  R. Watts.  Systematic ‘abnormal’ returns after quarterly earnings announcements , 1978 .

[9]  A. Kyle.  Continuous Auctions and Insider Trading , 1985 .

[10]  R. Ball.  Anomalies in relationships between securities' yields and yield-surrogates , 1978 .

[11]  Victor L. Bernard,et al.  POST-EARNINGS-ANNOUNCEMENT DRIFT - DELAYED PRICE RESPONSE OR RISK PREMIUM , 1989 .

[12]  P. C. O'brien,et al.  Analyst following and institutional ownership , 1990 .

[13]  Kenneth A. Froot,et al.  Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation , 1990 .

[14]  Sanford J. Grossman.  On the Impossibility of Informationally Efficient Markets , 1980 .

[15]  S. P. Kothari,et al.  Economic determinants of the relation between earnings changes and stock returns , 1990 .

[16]  R. Ball,et al.  An empirical evaluation of accounting income numbers , 1968 .

[17]  L. Brooks,et al.  The January Anomaly: Effects of Low Share Price , 1992 .

[18]  S. Viswanathan,et al.  A theory of the interday variations in volume , 1990 .

[19]  E. Fama,et al.  Efficient Capital Markets : II , 2007 .

[20]  R. Ball.  The earnings-price anomaly , 1992 .

[21]  E. B. Grant,et al.  Market Implications Of Differential Amounts Of Interim Information , 1980 .

[22]  Dennis E. Logue,et al.  Foundations of Finance. , 1977 .

[23]  Richard J. Rendleman,et al.  Empirical anomalies based on unexpected earnings and the importance of risk adjustments , 1982 .

[24]  M. Blume,et al.  Displayed and Effective Spreads By Market , 1992 .

[25]  L. Summers,et al.  Noise Trader Risk in Financial Markets , 1990, Journal of Political Economy.

[26]  Victor L. Bernard,et al.  Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior , 1992 .

[27]  V. Bernard,et al.  Evidence that stock prices do not fully reflect the implications of current earnings for future earnings , 1990 .

[28]  V. Bernard.  Stock price reactions to earnings announcements : a summary of recent anomalous evidence and possible explanations , 1992 .

[29]  Douglas A. Schroeder,et al.  Firm Prominence and the Differential Information Content of Quarterly Earnings Announcements , 1989 .