The proﬁtability, costs and systematic risk of the post-
earnings-announcement-drift trading strategy
Charlie X. Cai
Published online: 18 June 2013
Ó Springer Science+Business Media New York 2013
Abstract This paper re-examines the proﬁtability of the post-earnings-announcement-
drift (PEAD) trading strategy using a practical simulation approach that aligns with a fund
manager’s investment perspective. It allows us to calculate the break-even transaction costs
of following a PEAD strategy, and permits the explicit incorporation of transaction costs.
Using US data from 1974 to 2007, we show that the traditional event-study method
understates the risk and overstates the abnormal return of the PEAD strategy. Accounting
for transaction costs in a practical simulation framework, we show there is no abnormal
return (alpha) from the PEAD strategy in multi-factor asset pricing regression analyses.
These results are robust to sub-period analyses and alternative transaction cost measures.
The effects of intraday timing and information risk on the PEAD strategy are also
explored. Overall, our study shows that the practical aspects of implementing the PEAD
strategy are vitally important to evaluating the risk and return of the strategy. We provide a
practical, analytical tool that can be directly adopted by fund managers to study the PEAD
strategy with their institutional parameters of transaction costs and market timing.
Keywords Post earnings announcement drift Á Trading strategy Á Efﬁcient market
hypothesis Á Simulation approach Á Transaction costs
Department of Accounting and Finance, Leeds University Business School, University of Leeds,
Leeds LS2 9JT, UK
C. X. Cai (&)
Department of Finance, Bradford University School of Management, Emm Lane, Bradford BD9 4JL,
International Institute of Banking and Financial Services (IIBFS), Leeds University Business School,
University of Leeds, Leeds LS2 9JT, UK
Rev Quant Finan Acc (2014) 43:605–625