A paper recently accepted in the Journal of Financial and Quantitative Analysis studies the post-earnings-announcement drift. Together with my co-authors, Josef Fink and Erik Theissen, we are the first to use experiments to study this well-documented market anomaly. Specifically, we focus on the question of whether post-earnings-announcement drift is driven by investors insufficiently accounting for autocorrelation in companies’ earnings announcements. The paper first documents that post-earnings-announcement drift can be observed in the controlled environment of the experimental lab, opening the door to future experiments studying this and other mispricing anomalies. In our second and main result, we then show that, while prices drift even in the absence of earnings autocorrelation, the drift is considerably more pronounced in the presence of earnings autocorrelation. The specific price patterns observed suggest that the phenomenon is indeed driven by underreaction to autocorrelation. Finally, we report that – at least in our lab setting – the observed drift can be exploited to earn excess profits. (link to the paper) The study is part of a larger research project funded by the Austrian Science Fund (FWF) that has so far generated two published papers, two that are under review, and two that we are planning to submit to a journal soon.
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