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Liquidity and the post-earnings-announcement drift

Journal

Financial Analysts Journal

Subject

Accounting

Publishing details

Financial Analysts Journal 2009 Vol 65:4 p 18-32

Authors / Editors

Chordia T;Goyal A;Sadka G;Sadka R;Shivakumar L

Biographies

Lakshmanan Shivakumar

Publication Year

2009

Abstract

The post-earnings-announcement drift is a long-standing anomaly that conflicts with market efficiency. This study documents that the post-earnings-announcement drift occurs mainly in highly illiquid stocks. A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a monthly value-weighted return of 0.04 percent in the most liquid stocks and 2.43 percent in the most illiquid stocks. The illiquid stocks have high trading costs and high market impact costs. By using a multitude of estimates, the study finds that transaction costs account for 70-100 percent of the paper profits from a long-short strategy designed to exploit the earnings momentum anomaly.

Available on ECCH

No


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