Post-earnings announcement drift is an anomaly in financial markets. It causes cumulative abnormal returns of stocks of a company to drift for an extended period of time. This is a very important phenomenon for traders to understand. Therefore, we decided to provide you with an easy post-earning announcement drift definition and explanation. Let’s dive deep to find out all about the phenomenon.
Post earnings announcement drift definition
Post-earnings announcement drift refers to the tendency of stock prices to continue to behave in a normal predictable manner even after an earnings announcement. In other words, stock prices behave as if investors are still expecting an earnings announcement even after the public announcement of earnings.
Post earnings announcement drift explanation
Post-earnings announcement drift is a very common phenomenon in financial markets. Ball and Brown first discovered this anomaly in 1968. Since then, it has been thoroughly studied and documented in numerous financial markets.
According to the post earnings announcement drift phenomenon, stocks of a company continue to behave in a normal way even after an earnings announcement. Stock prices don’t experience an instantaneous full adjustment. Contrarily, prices continue to behave in a way as nothing has happened. And investors are still expecting an earnings announcement even though the company has announced and published earnings good or bad.
Post-earnings announcement drift is contrary to the efficient market hypothesis. The efficient market hypothesis predicts that stock prices generally experience an instantaneous price adjustment after an earnings announcement. Simply put, stock prices often move upwards if investors anticipate a positive outcome. Conversely, prices move downward if investors predict poor outcomes. However, several studies have confirmed that this does not happen all the time. And when this doesn’t happen, it means post-earnings announcement drift is in action.
Post-earnings announcement drift is explained through a number of hypotheses. However, investors’ under-reaction to an earnings announcement is the most widely accepted hypothesis. That means, investors don’t react to earning announcements in the way they should react. In fact, the earnings announcement should be immediately digested by investors and stock prices should instantaneously reflect.
However, this doesn’t happen all the time. As a result, stock prices continue to drift in a predictable manner. In simplest terms, the stock price of companies announcing positive returns continues to drift upwards. Conversely, the stock price of companies announcing negative returns continues to drift downward. Reports suggest that the drift may continue for the next 60 days or even more.
Post-earnings announcement drift is an anomaly in financial markets and refers to a phenomenon when stock prices continue to drift in the direction of earnings outcome. This phenomenon is contrary to the efficient market hypothesis that suggests stock prices immediately reflect an earnings announcement.