Stock Style, R&D Intensity, and Post-Earnings Announcement Drift
Student thesis: Doctoral Thesis
Related Research Unit(s)
Post-earnings announcement drift is the phenomenon where a stock's cumulative abnormal returns tend to drift in the direction of a recent earnings surprise for several weeks or even months following an earnings announcement. This anomaly poses a major challenge to the efficient market hypothesis, a market state where equity prices reflect all relevant information. Most researchers consider that this phenomenon arises due to delayed investors' responses to current earnings announcements. To explore the potential industrial applications of post-earnings announcement drifts, this study examines the dynamics of post-earnings announcement PEAD levels on the basis of stock styles, employed by the Vanguard Group in managing stock mutual funds. The empirical results reveal that, on average, firms with smaller market equity and higher earnings/price ratios (value firms) tend to experience higher post-earnings announcement drifts, whereas those with larger market equity and lower earnings/price ratios (growth firms) generally experience lower PEAD levels. Besides, because previous studies have documented the complications in the equity valuations for firms with more intangible assets, such as research and development (R&D) investments, this study also investigates whether and how firms' R&D intensity influences the dynamics of PEAD levels. The results may elucidate R&D investment decisions for firms' management. The results suggest that R&D intensity affects the level of post-earnings announcement drifts, and that investors tend to realize the information of earnings surprises in stock prices relatively more rapidly when earnings announcements are made by R&D intensive firms. Moreover, further tests show that there may exist some overlap between the stock style and R&D intensity effects on PEAD levels, but in general this overlap is quite small, and that the two factors each have some distinct impacts on the dynamics of PEAD.