Abstract
We investigated whether post-earnings announcement drift (PEAD) in the Korean stock market is related to investor inertial behavior under a directional trend in market sentiment. Given that investors tend to procrastinate due to their belief in the persistence of the current market’s condition and thus underreact to earnings information, we examined whether this investor inertia influences the drift in stock price following an earnings announcement. Our findings show that when the market sentiment continues to shift upwardly (downwardly) over the pre- and post-earnings announcement period, positive (negative) drift occurs. Note that these results are robust to control for the effect of market sentiment at a specific point in time. We suggest that investors do not fully respond to new earnings information due to investor inertial behavior under the market sentiment with a consistent trend. Overall, our study sheds light on a determinant of PEAD as one of the market anomalies in terms of investors’ cognitive bias by documenting the relation between PEAD and investor inertia.
Highlights
We investigate whether post-earnings announcement drift is associated with investor inertial behavior under a directional trend in market sentiment in the Korean stock market (KSE)
Given that the Post-Earnings Announcement Drift (PEAD) phenomenon is generally explained by a delayed stock response due to investors’ underreaction to earnings news, we focus on investor inertia, a type of cognitive bias in psychology, as an influential factor in PEAD
This study investigated whether the magnitude of stock price drift is systematically different by the change in market sentiment
Summary
We investigate whether post-earnings announcement drift is associated with investor inertial behavior under a directional trend in market sentiment in the Korean stock market (KSE). Post-earnings-announcement drift (PEAD) is defined as the anomalous stock price behavior in a capital market in which stock price moves continuously with directional unexpected earnings even after the earnings information is announced [1,2]. PEAD is defined as the phenomenon in which stock returns drift continuously for several periods in the direction of unexpected earnings following earnings announcement dates [1,2]. Since this contradicts the efficient market hypothesis, which suggests that stock price fully and immediately reflects the public information for future earnings in an earnings announcement period, PEAD is generally understood as an accounting-based market anomaly. Since Nah [18] reported the existence of PEAD, several studies have shown that information uncertainty [19] and investor sophistication [20,21] are related to this phenomenon
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