Auto-Correlation Structure of Forecast Errors from Time-Series Models: Implications for Post-Earnings Announcement Drift Studies, Journal of Accounting and Economics
This paper demonstrates that the evidence supporting the hypothesis that post-earnings announcement drift (PEAD) is caused by investors' failure to incorporate the implications of current earnings for future earnings is (also) consistent with researchers' over-differencing an already stationary time-series. Specifically, we show the evidence is driven by a subset of firms where over-differencing of quarterly earnings in estimating earnings surprises is most likely to have occurred. Given the persistence of the PEAD over time, our alternative explanation suggests that the prior research investigating the causes for the PEAD overestimates investors' naivete.
John Jacob, Thomas Lys, Jowell Sabino
Jacob, John, Thomas Lys, and Jowell Sabino. 1999. Auto-Correlation Structure of Forecast Errors from Time-Series Models: Implications for Post-Earnings Announcement Drift Studies. Journal of Accounting and Economics. 28(3)