The Post-Earnings-Announcement Drift and Liquidity Risk

Download or read book The Post-Earnings-Announcement Drift and Liquidity Risk written by Gil Sadka and published by . This book was released on 2011 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the relation between the post-earnings-announcement drift anomaly and liquidity. First, we find that, on average, bad-news firms (low standardized unexpected earnings (SUE)) are less liquid than good-news firms (high SUE), reflecting more information asymmetry and/or uncertainty among bad-news firms. Yet, we argue that this liquidity spread is less likely to explain the drift. Second, the returns of SUE-sorted portfolios are sensitive to fluctuations in market-wide liquidity. We find that systematic liquidity risk is an important determinant in explaining the cross-sectional variation of expected returns among SUE-sorted portfolios. This implies that a substantial part of the post-earnings-announcement drift anomaly can be viewed as compensation for risk associated with shocks to the information environment in the economy. Therefore, the evidence suggests that the previously reported anomalous returns are associated with model misspecification and/or hidden transaction costs.