Earnings response elasticity and post-earnings-announcement drift

Zhipeng Yan, Yan Zhao, Wei Xu, Lee Young Cheng

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

This article studies the relationship between initial market response to earnings surprise and subsequent stock price movement. We first develop a new measure-the earnings response elasticity (ERE)-to capture initial market response. It is defined as the absolute value of earnings announcement abnormal returns (EAARs) divided by the earnings surprise. The ERE is then examined under various categories contingent on the signs of earnings surprises (+/-/0) and EAARs (+/-). We find that a weaker initial market reaction to earnings surprises, or lower ERE, leads to a larger post-announcement drift. A trading strategy of taking a long position in stocks in the lowest ERE quintile when both earnings surprises and EAARs are positive and a short position when both are negative can generate an average abnormal return of 5.11 per cent per quarter.

Original languageEnglish (US)
Pages (from-to)287-305
Number of pages19
JournalJournal of Asset Management
Volume13
Issue number4
DOIs
StatePublished - Aug 1 2012

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Strategy and Management
  • Information Systems and Management

Keywords

  • PEAD
  • earnings response elasticity
  • earnings surprise

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