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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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