Article ID: | iaor201112346 |
Volume: | 34 |
Issue: | 3 |
Start Page Number: | 523 |
End Page Number: | 535 |
Publication Date: | Sep 2011 |
Journal: | Journal of Financial Research |
Authors: | Zolotoy Leon |
Keywords: | stock market |
Postearnings announcement drift is the tendency for cumulative abnormal returns to drift in the direction of earnings surprise after the earnings news is released. I show that a standard approach to measuring abnormal returns by using preannouncement estimates of market risk (betas) causes the magnitude of this phenomenon to be significantly underestimated. I find that stock beta tends to rise (fall) following the release of bad (good) earnings news. In addition, I find that by not taking into account postannouncement shifts in betas, prior studies are likely to have underestimated the magnitude of the drift. My results are robust to different model specifications, as well as to different earnings surprise measures.