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Accounting Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27762
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| Title: | Post Loss/Profit Announcement Drift |
| Authors: | Balakrishnan, Karthik
Bartov, Eli
Faurel, Lucile |
| Keywords: | Loss/profit mispricing;
loss/profit predictability;
accounting losses;
accounting profits;
earnings-based anomalies |
| Issue Date: | 13-Nov-2008 |
| Abstract: | We document a failure of the market to price the implications of a
current loss (profit) for a future loss (profit). In a 120-day window
following the quarterly earnings announcement date, a portfolio of firms
with extreme losses (profits) exhibits a -6.58 percent (3.55 percent)
abnormal return. These patterns in stock returns translate into an
annualized return of approximately 21 percent on a hedge portfolio that
takes a long position in an extreme profit firm quintile and a short
position in an extreme loss firm quintile. The results also demonstrate
that this loss/profit anomaly is incremental to, and more pronounced
than previously documented accounting-related anomalies. 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. A battery of sensitivity tests shows
that this loss/profit anomaly is robust to alternative risk adjustments,
distress risk, short sales constraints, transaction costs, and sample periods. |
| URI: | http://hdl.handle.net/2451/27762 |
| Appears in Collections: | Accounting Working Papers
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