Pead

In: Business and Management

Submitted By aliciacpy
Words 1388
Pages 6
The Post-Earnings Announcement Drift (PEAD) was discovered by Ball and Brown in 1968 and it is still one of the most robust discoveries in the financial markets. The phenomenon was discovered when testing for market efficiency. Ball and Brown (1968) were estimating how fast a financial market incorporates new earnings information into the stock prices. They found an upward drift much longer than expected in stock prices after a ”good news” earnings announcement and a similar downward drift for a ”bad news” announcement. PEAD is the tendency for a stock’s cumulative abnormal returns to drift for several weeks (even several months) following positive earnings announcement. It is an academically well-documented anomaly first discovered by Ball and Brown in 1968 (we present links to several related academic research papers). Since then it has been studied and confirmed by countless academics in many international markets. There are a number of ways to define an earnings surprise (or ways to filter stocks with positive response to earnings) - earnings higher than analysts estimates, earnings higher than some average earnings or stock’s price appreciation during earnings announcement period higher than expected. Each factor shows strong prediction ability for the stock’s future returns, and it is good to use some combination of factors just to enhance the PEAD effect. We present one such strategy from the source paper related to this anomaly. This strategy is presented in its long-short form, but most of the returns come from the long side so it is not a problem to implement it as long only. Research also shows that the main perfmorance contributors are small capitalization stocks therefore caution is recommended during the strategy’s implementation.
The most widely accepted explanation for this effect is investors' under-reaction to earnings announcements. It is also…...

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