Post loss/profit announcement drift

Karthik Balakrishnan, Eli Bartov, Lucile Faurel

Research output: Contribution to journalArticle

56 Scopus citations

Abstract

We document a market failure to fully respond to loss/profit quarterly announcements. The annualized post portfolio formation return spread between two portfolios formed on extreme losses and extreme profits is approximately 21 percent. This loss/profit anomaly is incremental to previously documented accounting-related anomalies, and is robust to alternative risk adjustments, distress risk, firm size, short sales constraints, transaction costs, and sample periods. In an effort to explain this finding, we show that this mispricing is related to differences between conditional and unconditional probabilities of losses/profits, as if stock prices do not fully reflect conditional probabilities in a timely fashion.

Original languageEnglish (US)
Pages (from-to)20-41
Number of pages22
JournalJournal of Accounting and Economics
Volume50
Issue number1
DOIs
StatePublished - May 2010

Keywords

  • Accounting losses/profits
  • Earnings-based anomalies
  • Loss/profit mispricing
  • Loss/profit predictability
  • Post-earnings-announcement drift

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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