“Anchoring, the 52-Week High and Post Earnings Announcement Drift” by Chuan-Yang Hwang
Finance Seminar
Author:
Thomas J. George
University of TorontoChuan-Yang Hwang
University of TorontoYuan Li
Loughborough University
Daily stock returns around positive earnings surprises are more muted when stock prices are nearer their 52-week highs. Returns around subsequent earnings announcements are higher for these firms, suggesting underreaction followed by a correction. A symmetric pattern exists for stocks that experience negative earnings surprises whose prices are far below their 52-week highs. A decomposition of monthly returns suggests that post-earnings announcement drift (PEAD) is largely explained by whether stock prices are near or far from their 52-week highs when extreme earnings news arrives. After accounting for the nearness of stocks’ prices to their 52-week highs, the contribution of earnings surprises to PEAD is insignificant. These findings support the hypothesis that investors underreact to extreme earnings news because they anchor their beliefs about stocks’ values on 52-week highs.
