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What is post-earnings-announcement drift?

Post-earnings-announcement drift

Post-earnings-announcement drift describes the tendency of stock prices to continue to behave as if investors were still anticipating corporate results, good or bad, despite the fact that the results have been published and are widely known.

Where have you heard about post-earnings-announcement drift?

Investment guides may refer to this puzzling phenomenon, as may the financial media. Your financial adviser may well have mentioned it. Companies in which you are invested, or their brokers or other advisers, may comment on it in the context of their share prices.

What you need to know about post-earnings-announcement drift.

Ahead of an earnings announcement, such as full-year profit figures, stock prices often move in anticipation of the expected outcome - generally upwards, in the case of likely good figures, and generally downwards, when the outlook is thought to be poor. The publication of the figures may be expected to end this trading pattern, because the facts are now known and should be incorporated in the price.

However, there is an observable tendency for the share price to continue to move in the direction in which it had travelled ahead of the figures, almost as if the results have yet to be announced. This can continue for about two months after the announcement.

First proposed in 1968, the phenomenon can be explained with a number of hypotheses. The most widely accepted explanation for the effect is investor under-reaction to earnings announcements.

Find out more about post-earnings-announcement drift.

Post-earnings-announcement drift can be seen as forming part of what is studied as behavioural finance. Learn more about behavioural finance here.

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