Does Differential Sensitivity to Aggregate Earnings Shocks Drive Post-Earnings-Announcement Drift?
This paper finds that returns to the post-earnings-announcement drift (PEAD) strategy result from differential sensitivity of individual stock returns to aggregate earnings shocks. Larger negative aggregate earnings shocks are associated with higher PEAD returns, because stocks in the PEAD's sell portfolio are more sensitive to aggregate earnings shocks than those in the buy portfolio. Such differential sensitivity to aggregate earnings shocks drives a significant portion of PEAD returns. During the 1985 to 2009 sample period, investors were on average negatively surprised by aggregate earnings shocks, leading to average positive returns to the PEAD strategy. Further analysis suggests that macroeconomic shocks (that work through aggregate earnings shocks) explain the variation in PEAD returns.
Nallareddy, Suresh. "Does Differential Sensitivity to Aggregate Earnings Shocks Drive Post-Earnings-Announcement Drift?" Columbia Business School, 2012.