CLAS: Colby Liberal Arts Symposium

Analysis of Post-Earnings-Announcement Market Reactions: Is There Still a Delayed Price Response and Can it Be Exploited?

Diamond 341

According to the efficient market hypothesis, financial markets are informationally efficient. Due to this fact, investors should not be able to consistently beat the market (achieve returns in excess of average market returns) because prices reflect all publicly available information and also instantly change to reflect any new public information. A deeper analysis of an informationally efficient market tells us that before any large news announcement, such as an earnings announcement or dividend initiation, the value of a companys stock may change in value due to investors and traders speculating on the stocks intrinsic value after the news release. In an informationally efficient market there will be little to no price change after the news is released, unless the announcement contained new news the earnings reported by the firm differed from analyst estimates prior to the announcement. The efficient market hypothesis would, in turn, lead investors to believe that when quarterly earnings are released to the market, that prices should reflect the news of these earnings prior to the event and should move slightly on the day of the event but should see little to no movement after the market has the information. In 1968, Ball and Brown were the first to study and note that, after earnings were announced, the estimated cumulative abnormal returns continued to drift up for firms that released good news and down for bad news firms. This drift that Ball and Brown analyzed is in contrast to what the efficient market hypothesis alludes to in regards to stock prices after an earnings announcement. It would be useful for investors to see if there is indeed a significant drift that occurs after earnings for a firm are announced and if so, whether it can be exploited.

https://digitalcommons.colby.edu/clas/2015/program/251