Does More Information Production Lead to Less Post-Earnings-Announcement Drift?

Not always. We document an inverse U-shaped relation between post earnings announcement drift (PEAD) and information environments: Firms with moderate information environments, such as small to medium-sized firms with 2-4 analyst following, have higher PEAD than firms with either richer or poorer information environments. To understand the non-monotonic relation between PEAD and information production, we build a 2-period model and characterize PEAD that closely maps into its empirical counterpart. We show that when investors have limited information processing capacity, PEAD increases with capacity when capacity is low and decreases with capacity when it is high. Our model highlights the distinction and subtle connection between how much and how fast information is incorporated into prices. When investors allocate less attention to earnings news due to binding processing capacity, competing information sources, or low liquidity, stock prices contain less earnings information in equilibrium, but prices converge to equilibrium faster precisely because less information is processed. We formally test our model using two quasi-natural experiments and find evidence consistent with our model predictions: PEAD increases for small firms after adopting EDGAR and decreases for small firms after losing analysts, a result reversed or non-existent for larger firms.