|Title:||Reexamination of earnings announcement drift : Hong Kong evidence|
|Subject:||Stocks -- Prices -- China -- Hong Kong|
Corporate profits -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department of Accountancy
|Pages:||viii, 72, 3 leaves : col. ill. ; 30 cm|
|Abstract:||Previous research has shown that there are consistent stock excess returns after earnings announcement. Several papers have identified the positive relationship between unexpected earnings and subsequent excess returns. If market is efficient all information should be impounded immediately. The repeated evidence of systematic excess returns after earnings announcements is anomalous. There are alternative explanations for the anomaly. It may due to systematic experimental errors, market inefficiency or misspecification of CAPM. The appropriate interpretation of earnings announcement drift is still controversial. This paper reexamines the post-earnings announcement drift, using a sample of firms listed on the Stock Exchange of Hong Kong (SEHK) for the 1988-96 period. We attempt to re-examine the drift phenomenon using both risk-based approach and informational efficiency framework. For the risk-based explanation, we attempt to examine whether two risk proxy factors (size and book-to-price ratio) help to explain the drift. Under informational efficiency perspective, a firm can be mispriced because transactions costs can prevent professionals from trading its shares. In this paper, we attempt to use trading volume as a proxy for the inverse of the indirect costs of trading and share price as a proxy for the inverse of the direct costs of trading. This paper presents evidence indicating that systematic post-earnings announcement drifts in security returns are associated with the sign and magnitude of unexpected earnings over the period [1,60], except for the positive unexpected earnings UE3 portfolios. We also find that Hong Kong market assimilates favourable information much faster than unfavourable information, the drift for positive UE portfolios is shorter than 60 days. Consistent with previous findings, beta cannot fully explain the drift and the level of analyst following does not appear to affect the drift. Size and B/P play little role in explaining the post announcement drift. Regression results indicate that both variables are insignificantly related to CAR[1,60]. Inconsistent with Bhushan's (1994) findings, share price does not show significant relationship with the drift. This may be related to the fact that direct transaction costs in Hong Kong are not as high as in US. In Hong Kong, the commission rate is constant at about 0.2-0.5 percent and the bid-ask spread differences between the price ranges are only about 1 percent. Trading Volume has a significant negative relationship with the drift. Moreover, we find that high trading volume firms have higher betas, which means that the negative relationship between the drift and trading volume is not due to risk reason. This paper's evidence suggests that unexpected earnings are significantly related to drift and indirect costs of trading play an important role in determining drift.|
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