Post earnings announcement drift and the roles of drift-enhanced factors in New Zealand

Abstract

This study examines the profitability of trading on analyst forecast-based earnings surprises during the post announcement period in the New Zealand stock market over the period 1994 to 2008. The results show that a post earnings announcement drift (PEAD) anomaly exists in the New Zealand equity market. A hedge strategy of going long the top quintile of earnings surprise stocks and short the bottom quintile of earnings surprise stocks can generate more than 6% excess return in the 60 days following the earnings announcement. I further test the association between PEAD and several control variables and find that PEAD is increasing in 1) earnings surprise defined relative to past earnings, and 2) the level of arbitrage risk. Interestingly, I do not find evidence of a positive relation between PEAD and revenue surprise after controlling for earnings surprise as documented in the United States (Jegadeesh and Livnat, 2006). There is also no evidence that the 2002 Disclosure Reform in the New Zealand Stock Exchange reduced the magnitude of PEAD.