Go Long…Make Money. Go Short…Make Money. All Good.

Go Long…Make Money. Go Short…Make Money. All Good.

April 3, 2013 Research Insights
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(Last Updated On: January 13, 2017)

Limited Attention and the Earnings Announcement Returns of Past Stock Market Winners

  • David Aboody, Reuven Lehavy, and Brett Trueman
  • A version of the paper can be found here.
  • Want a summary of academic papers with alpha? Check out our free Academic Alpha Database!


We document that stocks with the strongest prior 12-month returns experience a significant average market-adjusted return of 1.58 percent during the five trading days before their earnings announcements and a significant average market-adjusted return of 1.86 percent in the five trading days afterward. These returns remain significant even after accounting for transactions costs. We empirically test two possible explanations for these anomalous returns. The first is that unexpectedly positive news hits the market over the few days prior to these firms’ earnings announcements, and that unexpectedly negative news comes out just afterwards. The second possibility is that stocks with sharp run-ups tend to attract individual investors’ attention, and investment dollars, particularly before their earnings announcements. We do not find evidence for an information-based explanation; however, our analysis suggests the possibility that the trading decisions of individual investors are at least partly responsible for the return pattern we observe.

Data Sources:

CRSP, Factiva, and COMPUSTAT from 1971-2005.

Alpha Highlight:

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. Compute the 12-month momentum ending the last trading day of quarter t-1 for all stocks above $5 .
    • Sort firms into percentiles, and select the firms in the 99th percentile (highest) of past 12-month returns.
  2. Using the earnings announcement in quarter t  as day 0, firms in the top percentile for past 12-month returns on average earn cumulative market-adjusted returns of:
    • 1.58% from day -4 to 0 and  -1.86% from day +1 to +5.
  3. When restricting the sample to announcements outside of normal trading hours:
    • Buying on day -4 and selling on the open of day +1 on average earns a cumulative market-adjusted return of 3.09%, while initiating the short position on the open of day +1 and holding this position until day +5 on average earns a cumulative market-adjusted return of -3.05%.
  4. Last, the paper finds that trading decisions of individual investors (small and medium investors) who focus their limited attention to high performing stocks contribute to the increasing pre-announcement stock price.


  • Only trading the top 1% of momentum stocks would leave investors with a small number of stocks to trade.
  • While on average the returns to the strategy work, investing in 1 stock and holding throughout an earnings announcement could lead to large losses if there is bad news about the firm.
  • Half of the returns come from the short-side, which may be costly and difficult to implement for smaller firms.

Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.

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Please remember that past performance is not an indicator of future results. Please read our full disclosures. 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. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.

Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, 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 that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.