Determinants of post-announcement drift and market reaction to earnings announcements

Abstract

The aim of this dissertation is studying the determinants of the post-earnings-announcement drift (PEAD) and the market reaction to earnings announcements. We find strong evidence supportive of the existence of PEAD in the Turkish stock market with significant difference in average cumulative abnormal return between high and low earnings surprise firms in the 60 days following the quarterly earnings announcement. The positive relation between post-announcement abnormal returns and the surprise in earnings remain significant after controlling for an extensive list of explanatory variables. Among these variables, we find firm size has a negative impact on the magnitude of the positive association between surprise and subsequent equity returns. We also analyze the determinants of abnormal volume around earnings announcements. We show volume reaction to positive news is substantially higher than the reaction to negative news. This relation which is robust to the inclusion of a host of control variables is a novel addition to the literature which documents a link between abnormal volume and the magnitude of the surprise rather than the sign of the surprise. We discuss a behavioral explanation for this relation which centers on overconfident noise traders whose attention is grabbed by the positive surprises. Lastly, we study the information value of earnings announcements. We find significantly positive abnormal volume and abnormal absolute return in the three-day window around the earnings announcement which are also trending upwards over time. We take this as evidence that earnings news have information content and that its informativeness has increased through time.