Multi-Year PEAD: Predictive and Feedback Insights

Abstract

For many years, the post-earnings announcement drift (PEAD) has been accepted as an anomaly to the efficient markets hypothesis. This drift subsequent to earnings announcements has been ascribed to the incomplete incorporation by the market of the information in these earnings announcements. Interestingly, over the past five decades of extensive research, no rational economic explanation of the PEAD has been found. However, there has been no specific consideration of the effect of economic information subsequent to the earnings announcements. Our multi-year examination of the cumulative abnormal return (CAR) incorporates the effect of economic information subsequent to the earnings announcement of traditional PEAD studies. Our analysis shows that a PEAD can arise without recourse to invoking market inefficiency. Our results are consistent for three samples covering the period 1973 to 2016. We do not assert that we prove that there is no component of the PEAD due to market inefficiency. Rather, our results show that studies to determine whether there is a market inefficiency component of the PEAD should use a multi-period approach in order to account for the effect of economic information subsequent to the earnings announcements and thereby focus more precisely upon the cause of the PEAD reported in previous research studies.