Earnings news and market risk: is the magnitude of the postearnings announcement drift underestimated?

Earnings news and market risk: is the magnitude of the postearnings announcement drift underestimated?

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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:
Keywords: stock market
Abstract:

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.

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