Information Uncertainty and Post-Earnings-Announcement-Drift

Authors

  • Jennifer Francis,

    1. The first, third and fourth authors are from Duke University. The second author is from Massachusetts Institute of Technology. This research was supported by the Fuqua School of Business, Duke University and the Massachusetts Institute of Technology. Analysts' earnings forecasts are from Zacks Investment Research. The authors appreciate discussions with and comments from Brad Barber, Alon Brav, Magnus Dahlquist, Christi Gleason, Bruce Johnson, Chris Leach, Kevin Ow-Yong, Peter Pope (editor), David Robinson, Lakshmanan Shivakumar (the discussant), Pauline Weetman, and from workshop participants at the 2004 American Finance Association Meetings, Colorado State University, the 2006 JBFA Capital Markets Conference, the Swedish Institute for Financial Research, University of Iowa, and Washington University. A previous version of this paper was titled ‘Accounting Anomalies and Information Uncertainty.’
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  • Ryan Lafond,

    1. The first, third and fourth authors are from Duke University. The second author is from Massachusetts Institute of Technology. This research was supported by the Fuqua School of Business, Duke University and the Massachusetts Institute of Technology. Analysts' earnings forecasts are from Zacks Investment Research. The authors appreciate discussions with and comments from Brad Barber, Alon Brav, Magnus Dahlquist, Christi Gleason, Bruce Johnson, Chris Leach, Kevin Ow-Yong, Peter Pope (editor), David Robinson, Lakshmanan Shivakumar (the discussant), Pauline Weetman, and from workshop participants at the 2004 American Finance Association Meetings, Colorado State University, the 2006 JBFA Capital Markets Conference, the Swedish Institute for Financial Research, University of Iowa, and Washington University. A previous version of this paper was titled ‘Accounting Anomalies and Information Uncertainty.’
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  • Per Olsson,

    1. The first, third and fourth authors are from Duke University. The second author is from Massachusetts Institute of Technology. This research was supported by the Fuqua School of Business, Duke University and the Massachusetts Institute of Technology. Analysts' earnings forecasts are from Zacks Investment Research. The authors appreciate discussions with and comments from Brad Barber, Alon Brav, Magnus Dahlquist, Christi Gleason, Bruce Johnson, Chris Leach, Kevin Ow-Yong, Peter Pope (editor), David Robinson, Lakshmanan Shivakumar (the discussant), Pauline Weetman, and from workshop participants at the 2004 American Finance Association Meetings, Colorado State University, the 2006 JBFA Capital Markets Conference, the Swedish Institute for Financial Research, University of Iowa, and Washington University. A previous version of this paper was titled ‘Accounting Anomalies and Information Uncertainty.’
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  • Katherine Schipper

    Corresponding author
    1. The first, third and fourth authors are from Duke University. The second author is from Massachusetts Institute of Technology. This research was supported by the Fuqua School of Business, Duke University and the Massachusetts Institute of Technology. Analysts' earnings forecasts are from Zacks Investment Research. The authors appreciate discussions with and comments from Brad Barber, Alon Brav, Magnus Dahlquist, Christi Gleason, Bruce Johnson, Chris Leach, Kevin Ow-Yong, Peter Pope (editor), David Robinson, Lakshmanan Shivakumar (the discussant), Pauline Weetman, and from workshop participants at the 2004 American Finance Association Meetings, Colorado State University, the 2006 JBFA Capital Markets Conference, the Swedish Institute for Financial Research, University of Iowa, and Washington University. A previous version of this paper was titled ‘Accounting Anomalies and Information Uncertainty.’
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* Address for correspondence: Per Olsson, Fuqua School of Business, Duke University, Durham, NC 27708, USA. e-mail: pol@duke.edu

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.

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