Investments, tenth edition

  Post–Earnings-Announcement Price Drift 

  

A fundamental principle of effi-

cient markets is that any new information ought to be reflected in stock prices very rapidly. 

When good news is made public, for example, the stock price should jump immediately. 

A puzzling anomaly, therefore, is the apparently sluggish response of stock prices to firms’ 

earnings announcements, as uncovered by Ball and Brown.  

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   Their results were later con-

firmed and extended in many other papers.  

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 However, a study by S. P. Kothari, Jay Shanken, and Richard G. Sloan, “Another Look at the Cross-Section of 

Expected Stock Returns,”  Journal of Finance  50 (March 1995), pp. 185–224, finds that when betas are estimated 

using annual rather than monthly returns, securities with high beta values do in fact have higher average returns. 

Moreover, the authors find a book-to-market effect that is attenuated compared to the results in Fama and French 

and furthermore is inconsistent across different samples of securities. They conclude that the empirical case for 

the importance of the book-to-market ratio may be somewhat weaker than the Fama and French study would 

suggest. 

  

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 R. Ball and P. Brown, “An Empirical Evaluation of Accounting Income Numbers,”  Journal of Accounting 

Research  9 (1968), pp. 159–78. 

  

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 There is a voluminous literature on this phenomenon, often referred to as post–earnings-announcement price 

drift. For papers that focus on why such drift may be observed, see V. Bernard and J. Thomas, “Evidence That 

Stock Prices Do Not Fully Reflect the Implications of Current Earnings for Future Earnings,”  Journal of Account-

ing and Economics  13 (1990), pp. 305–40, or R. H. Battalio and R. Mendenhall, “Earnings Expectation, Inves-

tor Trade Size, and Anomalous Returns Around Earnings Announcements,”  Journal of Financial Economics   77 

(2005), pp. 289–319. 

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16

14

12

10

8

6

4

2

0

Book-to-Market Decile: 1 = Lowest, 10 = Highest

1

2

3

4

5

6

7

8

9

10

Annual Monthly Return (%)

10.92

11.66 11.64 11.59

12.98 13.25 13.32

15.31

15.87

16.87