Post Earnings Announcement Drift and Value/Growth Anomaly

June 4, 2014 Academic Research Recap, Architect Academic Insights, Value Investing
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When Two Anomalies Meet: The Post – Earnings Announcement Drift and the Value – Glamour Anomaly

Abstract:

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.

Alpha Highlight:

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).

When Two Anomalies Meet_ The Post-Earnings Announcement Drift and the Value-Glam_2014-05-30_20-58-00
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.

 

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:

 

When Two Anomalies Meet_ The Post-Earnings Announcement Drift and the Value-Glam_2014-05-30_21-09-01
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.

 

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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About the Author

Jack Vogel, Ph.D.

Jack conducts research in empirical asset pricing and behavioral finance, and has collaborated with Dr. Gray on multiple projects. His dissertation investigates how behavioral biases affect the value anomaly. His academic experience involves being an instructor and research assistant at Drexel University in both the Finance and Mathematics department. Jack Vogel is currently a Managing Member of Alpha Architect, LLC, an SEC-Registered Investment Advisor, where he heads the research department and serves as the comptroller. Jack has a PhD in Finance and a MS in Mathematics from Drexel University, and graduated summa cum laude with a BS in Mathematics and Education from The University of Scranton.


The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. 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 information is not intended to, and does not relate specifically to any investment strategy or product that Alpha Architect offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.