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Information Uncertainty and Post‐Earnings‐Announcement‐Drift

Information Uncertainty and Post‐Earnings‐Announcement‐Drift Abstract: We examine whether rational investor responses to information uncertainty (IU) explain properties of and returns to the post‐earnings‐announcement‐drift (PEAD) trading anomaly. Consistent with a rational learning explanation, we find that: (1) unexpected earnings (UE) signals that are characterized as having greater IU have more muted initial market reactions; (2) extreme UE portfolios are characterized by securities with higher IU than non‐extreme UE portfolios; and (3) within the extreme UE portfolios, high IU securities are more prevalent and earn larger abnormal returns than low IU securities. Further tests show that prior evidence of greater PEAD profitability for higher idiosyncratic volatility securities is explained by the greater information uncertainty associated with these securities. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Business Finance & Accounting Wiley

Information Uncertainty and Post‐Earnings‐Announcement‐Drift

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References (96)

Publisher
Wiley
Copyright
Copyright © 2007 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0306-686X
eISSN
1468-5957
DOI
10.1111/j.1468-5957.2007.02030.x
Publisher site
See Article on Publisher Site

Abstract

Abstract: We examine whether rational investor responses to information uncertainty (IU) explain properties of and returns to the post‐earnings‐announcement‐drift (PEAD) trading anomaly. Consistent with a rational learning explanation, we find that: (1) unexpected earnings (UE) signals that are characterized as having greater IU have more muted initial market reactions; (2) extreme UE portfolios are characterized by securities with higher IU than non‐extreme UE portfolios; and (3) within the extreme UE portfolios, high IU securities are more prevalent and earn larger abnormal returns than low IU securities. Further tests show that prior evidence of greater PEAD profitability for higher idiosyncratic volatility securities is explained by the greater information uncertainty associated with these securities.

Journal

Journal of Business Finance & AccountingWiley

Published: Apr 1, 2007

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