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Post Earning Announcement Drift

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by

jewe bastian

on 23 September 2013

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Transcript of Post Earning Announcement Drift

Post Earning Announcement Drift
Jessica Wijaya
Priska Yuwono
Yifei wang
Jiahui zhang
Cheming zhang

Post Earning Announcement Drift
- Market Efficiency

- Equity Market Anomaly

- PEAD: delayed response to
information in the stock market

- PEAD Phenomenon
--> Good News : Drift Upward
--> Bad News: Drift Downward
Empirical test to identify a drift
Conducting Simple Trading Strategy

Sample : NYSE/AMEX firms and NASDAQ

Measuring of earning surprise and the key to profit
1. Analyst Forecast-based and Past-earning based measure of earning

2. This leads to unexpected earnings or PEAD

3. Earning surprise

Strategy to enjoy a post earning announcement drift
Company meet three things in their earning release:
- Current earning surprise
- Current firm performance
- Future firm performance

To find post-earnings announcement price drift:
- Investor needs set of data analysis

Reasons of PEAD
1. A portion of the price response to a new information is delayed

2. CAPM is incomplete / misestimated

1. EAR

abnormal return for firm



2. SUE

- Earnings surprise : standard deviation of earnings surprise

- Earning surprise = actual earnings – expected earnings

-Expected earnings computed using a seasonal random walk 
3. Portfolio assignment



a bias is introduced when firms are assigned to portfolios.  

- Good news : investors take long position in the stocks

- Bad news : investors take short position in stocks

- Holding period : one quarter (60 working days)

- Portfolio is rebalanced every quarter

Current Earning surprise
- Rank earnings surprise at the calendar quarter of the earnings announcements

- Lead to ------a peek-head bias in the returns of the earnings

- Limitation: require a full collection of all earnings reported in the same calendar quarter for the ranking procedure

Current and Future firm performance
- Current firm performance predicts future firm performance

- Three metrics of firm performance
1. EARNINGS--------by the market price at the end of year
2. ROE (return on equity)-------by equity value at the end of year
3. ROA (return on assets)----------by total assets at the end of year

Data analysis for earning announcements
- IBES sample-------IBES International Detail File for all Chinese firms over the period 1994-2009.

- The Bloomberg sample--------Bloomberg : wider coverage of 36,772 quarterly earnings announcements from Chinese firms over the period 1994-2009

Profiting from Post earning announcement drift
- Using the SUE (standardized unexpected earnings) to quantify how actively a fund trades on the drift anomaly

- SIM, which is essentially the covariance between portfolio weight changes and SUEs of individual stocks traded by the fund

- SIM4: the rolling average of SIMs over four quarters
THANK YOU
Profiting from Post earning announcement drift
- To examine the effect of transaction costs on mutual funds’ PEAD related trading:
1. estimate transaction costs for sample funds
2. relate the SUE investing measures to an extensive set of fund characteristics

- the higher fund return volatility for funds more actively trading on PEAD is due to a combination of two factors:
1. higher return volatility of stocks in the fund portfolios
2. the lack of diversification by the funds

-Mispricing
significantly negative relation


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