Post-Earnings Announcement Drift: Ranking Stocks by Earnings News
Summary
Post-earnings announcement drift (PEAD) is the tendency for stocks to continue moving in the direction of an earnings surprise after the announcement. The document describes a quarterly US equity strategy combining two signals: standardized unexpected earnings (SUE), based on actual earnings relative to a seasonal earnings model, and earnings announcement return (EAR), the abnormal stock return around the announcement. Stocks are ranked on both measures using prior-quarter data, and the strategy buys the intersection of the top groups while shorting the bottom groups after the announcement; the portfolio is held for about a quarter. The page also notes that much of the reported effect comes from the long side.
The cited research reports stronger results when EAR and SUE are combined, and related studies find drift in other markets. The proposed explanation is investor underreaction, potentially linked to earnings and price momentum. These findings do not establish that the effect persists after costs or in every market regime. The strategy’s results are said to rely heavily on small-cap stocks, and its ability to hedge equity risk is unknown without further testing.
Key ideas
- PEAD describes continued abnormal stock returns after an earnings announcement.
- The strategy combines earnings surprise and announcement-period abnormal return to rank stocks.
- Prior-quarter information is used for sorting, with quarterly rebalancing and a roughly one-quarter holding period.
- The cited research reports stronger results from combining EAR and SUE than from using either signal alone.
- Small-cap stocks contribute substantially to the effect, which may limit implementation and capacity.
- The document does not establish whether PEAD hedges equity risk during market crises.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.