Earnings Reactions and Post-Earnings Drift

Post earnings announcement drift (PEAD) is one of the longest studied patterns in finance. After a company reports a large positive earnings surprise, its stock has tended to keep rising for weeks or months; after a large negative surprise, it has tended to keep falling. If markets absorbed information instantly, prices would jump to their new level on the announcement day and then stop. The drift suggests investors are slow to fully digest earnings news.

The research#

• Ball and Brown (1968) first documented that stock prices continued to move after earnings announcements in the direction of the earnings news.
• Bernard and Thomas (1989, 1990) showed the drift was strongest for the most extreme surprises and lasted around 60 trading days, with notable moves around the next quarter's announcement.
• Later studies found the effect in many countries, though its size has shrunk in large US stocks in recent decades as more traders exploit it.

How it is measured#

Researchers rank stocks by standardised unexpected earnings (SUE):

SUE = (actual EPS - expected EPS) / standard deviation of past surprises

Stocks in the highest SUE group are then compared with those in the lowest group over the following weeks.

Why drift might happen#

Drift and momentum#

PEAD is closely related to earnings momentum and price momentum. Stocks with positive surprises, rising estimates and strong price trends often share the same drivers. Many quantitative strategies combine these signals. See Momentum Factor and Combining Signals.

Has the effect faded?#

Research suggests the drift has weakened in large, heavily traded US stocks, likely because quantitative funds and high speed traders now act on earnings news quickly. It remains more visible in smaller stocks, less covered companies and some international markets, where trading costs are higher. This pattern of a documented effect shrinking after publication is common. See Signal and Alpha Decay.

Using drift in trading#

1. Focus on large surprises with strong price reactions and higher volume.
2. Confirm with guidance raises and upward estimate revisions.
3. Use the post earnings gap as a reference: strength holding above the gap supports continuation. See Price Gaps and How to Trade Them.
4. Manage risk: use stops below the gap or key levels; not every surprise drifts.
5. Account for costs in smaller stocks.

Risks#

• Reversals when the initial reaction was overdone.
• Market wide moves can swamp stock specific drift.
• Crowding in popular quant signals.
• Small sample bias when testing on a few stocks.

Frequently asked questions#

What is post earnings announcement drift?#

The tendency for a stock to keep moving in the direction of an earnings surprise for weeks after the announcement.

Why does post earnings drift happen?#

Possible reasons include investor underreaction, gradual analyst revisions, limited attention and trading frictions.

Does post earnings drift still work?#

It has weakened in large US stocks but has remained more visible in smaller and less covered stocks and in some international markets.

Next, learn how companies share profits with shareholders in Dividends.

Sources#

• Wikipedia, Post earnings announcement drift