Premium
EARNINGS NEWS AND MARKET RISK: IS THE MAGNITUDE OF THE POSTEARNINGS ANNOUNCEMENT DRIFT UNDERESTIMATED?
Author(s) -
Zolotoy Leon
Publication year - 2011
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2011.01301.x
Subject(s) - earnings surprise , post earnings announcement drift , earnings , economics , econometrics , surprise , magnitude (astronomy) , stock market , stock (firearms) , abnormal return , financial economics , monetary economics , earnings response coefficient , stock exchange , finance , geography , physics , psychology , social psychology , context (archaeology) , archaeology , astronomy
Postearnings announcement drift is the tendency for cumulative abnormal returns to drift in the direction of earnings surprise after the earnings news is released. I show that a standard approach to measuring abnormal returns by using preannouncement estimates of market risk (betas) causes the magnitude of this phenomenon to be significantly underestimated. I find that stock beta tends to rise (fall) following the release of bad (good) earnings news. In addition, I find that by not taking into account postannouncement shifts in betas, prior studies are likely to have underestimated the magnitude of the drift. My results are robust to different model specifications, as well as to different earnings surprise measures.