Why Has PEAD Declined Over Time? The Role of Signal Informativeness

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2022
Authors
Kettell, Laura
McInnis, John
Zhao, Wuyang
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Abstract
Post-earnings-announcement drift (PEAD) has declined significantly in recent decades, and perhaps disappeared. The prevailing explanation is that increased arbitraging activities have led to its attenuation. We propose a new explanation based on a decline in the informativeness of current earnings news in predicting future earnings news, which we label “signal informativeness.” We show that the signal informativeness of standardized unexpected earnings (SUE) has declined and significantly explains variation in PEAD over time. In fact, once we account for declining SUE signal informativeness, the downward trend in PEAD is no longer significant. The role of SUE signal informativeness in explaining declining PEAD survives when we control for several common proxies for arbitraging activities. Further, PEAD is still alive in recent years for firms with high predicted signal informativeness. Overall, we conclude that the declining signal informativeness of earnings news is a key driver behind the attenuation of PEAD.
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PEAD, Attenuation, SUE, Signal Informativeness, Arbitrage, Short Selling, Anomaly
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