Earnings response elasticity and post-earnings-announcement drift

Document Type

Article

Publication Date

8-1-2012

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. © 2012 Macmillan Publishers Ltd.

Identifier

84864871901 (Scopus)

Publication Title

Journal of Asset Management

External Full Text Location

https://doi.org/10.1057/jam.2012.8

e-ISSN

1479179X

ISSN

14708272

First Page

287

Last Page

305

Issue

4

Volume

13

This document is currently not available here.

Share

COinS