Premium
Investor Perceptions of Earnings Processes and Post‐announcement Drifts *
Author(s) -
Lee BongSoo,
Rui Oliver M.
Publication year - 2011
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/j.2041-6156.2010.01034.x
Subject(s) - earnings , sophistication , earnings response coefficient , post earnings announcement drift , economics , portfolio , proxy (statistics) , financial economics , price–earnings ratio , stock (firearms) , econometrics , complement (music) , monetary economics , accounting , earnings per share , mathematics , social science , biochemistry , statistics , chemistry , complementation , sociology , gene , phenotype , mechanical engineering , engineering
In this paper, we generalize Bernard and Thomas’s [ Journal of Accounting and Economics 13 (1990), 305]“delayed response” hypothesis as an explanation of post‐earnings‐announcement drifts. By applying a modified version of Beveridge and Nelson’s technique of decomposing a time‐series process of earnings into permanent and temporary components, we estimate the relative weight to proxy for investor perception on the temporary component of earnings. We then provide evidence that our measure of investor misperception explains post‐announcement drifts after controlling for firm size and investor sophistication. These findings reinforce Bernard and Thomas’s [ Journal of Accounting and Economics 13 (1990), 305] conjecture that less weight is placed on temporary components of earnings than would be appropriate if earnings processes were well understood, although not zero as Bernard and Thomas implicitly assumed in their portfolio formation rule. Our results also complement Ball and Bartov’s [ Journal of Accounting and Economics 21 (1996), 319] result that investors partially, but not fully, adjust for serial correlation in seasonal differences.