Post-Earnings Announcement Drift and Market Participants' Information Processing Biases

Open Access
Liang, Lihong
Graduate Program:
Business Administration
Doctor of Philosophy
Document Type:
Date of Defense:
June 07, 2002
Committee Members:
  • Zhen Luo, Committee Member
  • Paul David Fischer, Committee Member
  • James Mckeown, Committee Chair
  • Orie Edwin Barron, Committee Member
  • Market Efficiency
  • Post-Earnings Announcement Drift
ABSTRACT This paper presents evidence indicating post-earnings announcement drift can be partially attributed to investors' information processing biases: (1) overconfidence in private information; (2) overconfidence in less reliable information and underconfidence in more reliable information. The results suggest that drift occurs when investors overreact to their private information, which is consistent with a common implication of two models (Daniel et al. (1998); Fischer, (2001)). The results also indicate that drift can be attributed to investors' underreaction to more reliable earnings announcements, which is consistent with experimental studies in psychology (Griffin and Tversky (1992)) and accounting (Bloomfield et al. (1998)). In addition, this study provides insight into the puzzling relationship between forecast dispersion and drift documented in prior research. The empirical results lend credence to claims that anomalies, such as post-earnings announcement drift, represent market inefficiencies arising from imperfect investors' information processing behaviors.