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Information Uncertainty and Post‐Earnings‐Announcement‐Drift
Author(s) -
Francis Jennifer,
Lafond Ryan,
Olsson Per,
Schipper Katherine
Publication year - 2007
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2007.02030.x
Subject(s) - post earnings announcement drift , earnings , economics , volatility (finance) , profitability index , financial economics , market efficiency , anomaly (physics) , monetary economics , econometrics , earnings response coefficient , finance , physics , condensed matter physics
We examine whether rational investor responses to information uncertainty (IU) explain properties of and returns to the post‐earnings‐announcement‐drift (PEAD) trading anomaly. Consistent with a rational learning explanation, we find that: (1) unexpected earnings (UE) signals that are characterized as having greater IU have more muted initial market reactions; (2) extreme UE portfolios are characterized by securities with higher IU than non‐extreme UE portfolios; and (3) within the extreme UE portfolios, high IU securities are more prevalent and earn larger abnormal returns than low IU securities. Further tests show that prior evidence of greater PEAD profitability for higher idiosyncratic volatility securities is explained by the greater information uncertainty associated with these securities.