Implications of Transaction Costs for the Post-Earnings Announcement Drift

By Jeffrey Ng, T. Rusticus, Rodrigo S. Verdi. 2008

209 citations recorded by the source corpus.

ABSTRACT This paper examines the effect of transaction costs on the post-earnings announcement drift (PEAD). Using standard market microstructure features we show that transaction costs constrain the informed trades that are necessary to incorporate earnings information into price. This implies weaker return responses at the time of the earnings announcement and higher subsequent returns drift for firms with higher transaction costs. Consistent with this prediction, we find that earnings response coefficients are lower for firms with higher transaction costs. Using portfolio analyses, we find that the profits of implementing the PEAD trading strategy are significantly reduced by transaction costs. In addition, we show, using a combination of portfolio and regression analyses, that firms with higher transaction costs are the ones that provide the higher abnormal returns for the PEAD strategy. Our results indicate that transaction costs can provide an explanation not only for the persistence but also for the existence of PEAD. Copyright (c)University of Chicago on behalf of the Institute of Professional Accounting, 2008.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/a92ccc591779bafcc85ee0881c937e17ead4f41c

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Citations in the corpus

On the Use of Instrumental Variables in Accounting Research (2010, methodology): “We follow the approach in Ng, Rusticus, and Verdi (2008) to clean and aggregate the transactions data.”
Can Twitter Help Predict Firm-Level Earnings and Stock Returns? (2018, unknown): “Specifically, FE is the I/B/E/S reported quarterly earnings per share less the latest I/B/E/S consensus analyst quarterly earnings per share forecast just prior to the earnings announcement date, scaled by the stock price as of the forecast date, multiplied by 100 (see, e.g., Ng et al. 2008).”
Liquidity and the Post-Earnings-Announcement Drift (2009, background): “Ng, Rusticus, and Verdi (2008) also studied bid–ask spreads (as well as commissions) and found that the returns of the PEAD strategy are significantly reduced (although not eliminated).”
The Role of Newswires in Screening and Disseminating Value-Relevant Information in Periodic SEC Reports (2011, methodology): “…our intraday return and volume metrics are measured using the TAQ trade files by keeping only trades that meet all of the following criteria (Ng et al. 2008): (i) trades occurred on the NYSE, AMEX or NASDAQ; (ii) trades were made under regular market conditions; (iii) trades were made…”
Accounting Anomalies and Fundamental Analysis: A Review of Recent Research Advances (2010, background): “of transactions costs and price pressure, Bushee and Raedy (2006), and the papers examining arbitrage risk and liquidity costs (e.g., Pontiff, 2006; Mashruwala et al., 2006; Ng et al., 2008).”
The role of the media in disseminating insider-trading news (2016, unknown): “In contrast, the release of earnings news quickly results in the production of various forms of analysis by market 4 For example, Ng et al. (2008) show that transactions costs help explain post-earnings announcement drift by restricting the ability of informed traders to trade on earnings…”