Post Earnings Announcement Drift (PEAD) is a well-documented financial anomaly and a financial phenomenon where a stock’s price continues to move in the direction of an earnings surprise (positive or negative) for week’s or even months after an earnings announcement. When a company reports earnings that significantly beat or miss analyst expectations, the stock often experiences an initial price reaction, but the price then “Drifts” in the direction of the “beat or miss” over time rather than adjusting immediately.PEAD suggests markets are not fully efficient as prices do not fully reflect all available information. Investors may underreact or overreact to fresh data leading to a gradual incorporation of the information. The Drift can persist for 1-3 months until fresh data is released by the company or new research is produced by analysts. Research suggests that “abnormal returns” can be made during this period with stocks in the top decile of earnings surprises outperforming those in the bottom decile by 3-5% in the subsequent quarter.What is PEAD in financial literature?Post-Earnings Announcement Drift (PEAD), also known as the Standardized Unexpected Earnings (SUE) effect, is one of the oldest and most persistent capital market anomalies, first identified by Ball and Brown in 1968. It describes the tendency for a stock’s abnormal returns (returns exceeding market expectations) to continue drifting in the direction of an earnings surprise—positive or negative—for weeks or even months after an earnings announcement. This drift challenges the efficient market hypothesis, which assumes that new information, such as earnings data, is immediately reflected in stock prices.Research, including Bernard and Thomas (1989, 1990), highlights that PEAD occurs because investors underreact to the implications of current earnings for future earnings, leading to a gradual price adjustment. Notably, a significant portion (25-30%) of the drift concentrates around the three subsequent quarterly earnings announcements, despite these periods representing only about 5% of trading days.How the EPSMomentum PEAD Model WorksOur EPSMomentum PEAD Model refines the traditional PEAD framework by focusing on the immediate market reaction within the first 24 hours after an earnings announcement and leveraging this to forecast price movements over the next 90 days. Unlike the broader PEAD concept, which tracks cumulative abnormal returns over extended periods, our model uses a narrow window to define four market configurations based on two key variables:Premarket/After-Hours Price Movement:
For earnings announced Before Market Open (BMO), we measure the price change in premarket trading.
For earnings announced After Market Close (AMC), we measure the price change in after-hours trading.
This captures the initial market reaction to the earnings surprise.
Regular Trading Session Price Movement:
We measure the price change during the next regular trading session (e.g., the day after an AMC announcement or the same day for a BMO announcement).
This reflects how the market adjusts to the initial reaction.
These variables define four PEAD configurations, each indicating whether the market underreacts or overreacts to the earnings announcement:A - Positive Under-reaction:
The stock rises in premarket (BMO) or after-hours (AMC) trading and continues to rise in the next trading session.
Interpretation: The market views the initial upward move as insufficient, confirming the positive earnings surprise, leading to a sustained upward drift.
B - Positive Over-reaction:
The stock rises in premarket (BMO) or after-hours (AMC) trading but falls in the next trading session.
Interpretation: The market considers the initial upward move excessive, prompting a short-term correction, but the positive earnings surprise still drives a gradual upward drift.
C - Negative Over-reaction:
The stock declines in premarket (BMO) or after-hours (AMC) trading but rises in the next trading session.
Interpretation: The market views the initial downward move as excessive, leading to a short-term rebound, but the negative earnings surprise typically results in a gradual downward drift.
D - Negative Under-reaction:
The stock declines in premarket (BMO) or after-hours (AMC) trading and continues to decline in the next trading session.
Interpretation: The market sees the initial downward move as insufficient, reinforcing the negative earnings surprise, leading to a sustained downward drift.PEAD Forecast: "forecast": The forecast price move from the end of day one after earnings and the end of the quarter.PEAD Actual: "actual": the actual price move between day 1 and the current day. To compare with the forecast value.PEAD Sample Size: "sample_count" the number of sample taken in the study.PEAD Accuracy: "accuracy" the propability of the stock to end up inside the drift.
