Liquidity and the Post-Earnings-Announcement-Drift

Liquidity and the Post-Earnings-Announcement-Drift
Author(s): Chordia, Tarun and Goyal, Amit and Sadka, Gil and Sadka, Ronnie and Shivakumar, Lakshmanan
Year: 2006
Paper Number: GBS-FIN-2006-001
Goizueta Department: Finance

Abstract

The post-earnings-announcement-drift is a long standing anomaly that is in conflict with weak-form market efficiency. This paper documents that the postearnings- announcement-drift occurs mainly in the highly illiquid stocks. A trading strategy that goes long the high earnings surprise stocks and short the low earnings surprise stocks provides a return of 0.24% in the most liquid stocks and 1.79% per month in the most illiquid stocks. The illiquid stocks have high trading costs and market impact costs. Using a multitude of estimates we find that transaction costs account for anywhere from 66% to 100% of the paper profits from the long-short strategy designed to exploit the earnings momentum anomaly.