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When Two Anomalies Meet: The Post-Earnings Announcement Drift and the Value-Glamour Anomaly

Last Updated on 10 February, 2024 by Rejaul Karim

In the intricate tapestry of market anomalies, Zhipeng Yan and Yan Zhao weave a compelling narrative in their 2011 exploration titled “When Two Anomalies Meet: The Post-Earnings Announcement Drift and the Value-Glamour Anomaly.”

Venturing into the confluence of these anomalies, the authors unravel a tale where value stocks, shrouded in information uncertainty, emerge as protagonists. Their journey through market reactions to earnings surprises unveils a nuanced dance: value stocks, initially more stoic, boast superior post-earnings announcement drifts compared to their glamour counterparts.

The implications are profound—an ingenious trading strategy born from these insights yields an average annual abnormal return of 16.6-18.8 percent, a testament to the power hidden within the intricate interplay of market anomalies.

Abstract Of Paper

This study of the post-earnings announcement drift and the value-glamour anomaly finds that value stocks have greater information uncertainty, exhibit more-muted initial market reactions to earnings surprises, and have better (more positive or less negative) post-earnings announcement drifts than do glamour stocks. A trading strategy based on these findings can generate an average annual abnormal return of 16.6-18.8 percent before transaction costs.

Original paper – Download PDF

Here you can download the PDF and original paper of When Two Anomalies Meet: The Post-Earnings Announcement Drift and the Value-Glamour Anomaly.

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Author

Zhipeng Yan
New Jersey Institute of Technology

Yan Zhao
City College – City University of New York

Conclusion

In conclusion, the convergence of the post-earnings announcement drift and the value-glamour anomaly sheds light on the intricate dynamics of market behavior. Unveiling that value stocks harbor greater information uncertainty and display more tempered initial responses to earnings surprises, this study underscores the nuanced nature of market reactions.

The discerned post-earnings announcement drift variations between value and glamour stocks illuminate intriguing opportunities for a shrewd trading strategy. With the potential to yield an impressive average annual abnormal return ranging from 16.6% to 18.8%, this research not only enriches our understanding of market anomalies but also presents a compelling avenue for strategic investment decision-making.

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FAQ

Q1: What is the key insight revealed by the study regarding value and glamour stocks in the context of post-earnings announcement drift?
A1: The study uncovers that value stocks, characterized by greater information uncertainty, exhibit more-muted initial market reactions to earnings surprises compared to glamour stocks. Additionally, value stocks demonstrate better post-earnings announcement drifts, showcasing a nuanced pattern in market behavior between these two categories.

Q2: How does the study propose a trading strategy based on the identified anomalies, and what are its potential returns?
A2: The study proposes a trading strategy leveraging the observed dynamics of post-earnings announcement drift and the value-glamour anomaly. This strategy has the potential to generate an average annual abnormal return ranging from 16.6% to 18.8%, highlighting the practical implications and profitability hidden within the interplay of these market anomalies.

Q3: What broader significance does the research hold for investment decision-making?
A3: The research enriches our understanding of market anomalies by unraveling the intricate dynamics between the post-earnings announcement drift and the value-glamour anomaly. Beyond academic insights, the study offers a compelling avenue for strategic investment decision-making, providing investors with valuable information to navigate and capitalize on the nuanced behavior of value and glamour stocks in response to earnings surprises.

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