When Two Anomalies Meet: The Post – Earnings Announcement Drift and the Value – Glamour Anomaly
- Yan and Zhao
- A version of the paper can be found here.
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This study of the post – earnings announcement drift and the value – glamour anomaly finds that value stocks have greater information uncertainty, exhibit more-muted initial market reactions to earnings surprises, and have better (more positive or less negative) post – earnings announcement drifts than do glamour stocks. A trading strategy based on these findings can generate an average annual abnormal return of 16.6–18.8 percent before transaction costs.
The authors document that earnings surprises produce larger reactions for growth firms compared to value firms (as measured by the earnings announcement abnormal returns – EAAR). This may be due to investors paying more attention to growth firms than value firms. Second, the paper shows that when there is a positive earnings surprise (and positive EAAR), value firms have a larger post-earnings announcement drift. When there is bad news (and a negative EAAR), value firms have better post-earnings announcement drift (less negative).
A three-month trading strategy, which goes long value firms with positive earnings surprise and positive EAAR, and short growth firms with a negative earnings surprise and negative EAAR, produces the following returns:
The results fit with a behavioral story that investor attention is focused on sexy growth stocks and less focused on boring value firms.
Surprising earnings can be healthy for your portfolio!
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