By |Published On: February 22nd, 2013|Categories: Research Insights|

Investor Inattention and Friday Earnings Announcements

  • Steffano Dellavigna and Joshua M. Pollet
  • A version of the paper can be found here.
  • A formal write-up can be found at Empiritrage.com
  • Want a summary of academic papers with alpha? Check out our free Academic Alpha Database!

Abstract:

Does limited attention among investors affect stock returns? We compare the response to earnings announcements on Friday, when investor inattention is more likely, to the response on other weekdays. If inattention influences stock prices, we should observe less immediate response and more drift for Friday announcements. Indeed, Friday announcements have a 15% lower immediate response and a 70% higher delayed response. A portfolio investing in differential Friday drift earns substantial abnormal returns. In addition, trading volume is 8% lower around Friday announcements. These findings support explanations of post-earnings announcement drift based on underreaction to information caused by limited attention.

Data Sources:

IBES, CRSP, and COMPUSTAT from 1984 to 2006.

Alpha Highlight:

2013-02-22 10_50_04-earnfr080204

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Strategy Summary:

    1. Paper compares the reaction to earnings announcements of firms reporting on Fridays to those reporting on all other days of the week.  The time period of the study is January 1984 – June 2006.

 

    1. The consensus forecast is the median earnings forecast over the last 30 days before the announcement date.

 

    1. The earnings surprise is calculated as the  difference between the earnings announcement and the consensus earnings forecast, normalized by the price of a share.

 

    1. Paper finds that Friday earnings surprises have a lower initial response, a larger post-announcement drift, and lower trading volume compared to non-Friday earnings announcements.

 

  1. Last, paper gives a monthly long/short strategy that generates a monthly alpha of 4.62%.
    1. Go long all firms in the top 20% Friday positive earnings surprises for the past month and go short all firms in the bottom 20% non-Friday negative earnings surprises for the past month.
    2. Form this equal-weighted portfolio on the 1st of the month, and hold for 1 month.  Rebalance monthly.

Commentary:

  • While the alpha estimates are very high for the long/short portfolio, there is no size cutoff for firms, so some of these results may be driven by small firms.
  • Additionally, some of the short positions required in the long/short portfolio may have high costs of borrowing.

About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

Important Disclosures

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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