Anomalous Stock Returns Around Internet Firms' Earnings Announcements

Abstract

This paper presents evidence of persistent anomalies in internet firms' stock returns surrounding their quarterly earnings announcements. There is a general run-up in prices in the days prior to the earnings announcement, which extends through the market opening on the day subsequent to the release. This is followed by a price reversal lasting for several days. The magnitude of the market-adjusted returns associated with these price movements exceeds 11 percent over a 10-day period. There is little evidence to suggest that these returns can be explained either by the earnings news disclosed or by changes in risk around the earnings announcements. Additional analyses suggest that these return patterns are driven, at least in part, by price pressure which exists in the days before internet firms' earnings announcements. A trading strategy designed to exploit these price patterns would have generated a daily return of more than 1 percent over the sample period.