Institutional Overconfidence, Earnings Announcements, and Post-Earnings Drift

Summary

This research summary examines whether institutional trading before earnings announcements contributes to mispricing and post-earnings announcement drift (PEAD). It measures abnormal institutional demand before announcements and relates it to subsequent abnormal stock returns. The reported association is negative: stronger abnormal demand before an announcement predicts returns in the opposite direction afterward. A placebo comparison using false announcement dates finds no similar predictive relation, which the authors use to argue that ordinary trading price impact alone does not explain the pattern.

The proposed explanation is institutional overconfidence. The negative relation is reported as stronger for stocks that are harder to value or have greater information asymmetry. The summary also describes self-attribution: when earnings confirm institutions’ prior views, their confidence may increase and delay price correction; when news contradicts those views, correction may occur sooner. The account draws on a historical sample and observational evidence, so the findings support an interpretation rather than proving that overconfidence causes PEAD or establishing a directly tradable rule.

Key ideas

• Abnormal institutional demand before earnings announcements is reported to predict subsequent abnormal returns negatively.
• A placebo analysis finds no comparable predictive relation around false announcement dates.
• The association is stronger for stocks described as harder to value or more information asymmetric.
• Earnings that confirm prior institutional views may reinforce confidence and delay price correction.
• The evidence is observational and does not establish a trading strategy’s profitability.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.