The granddaddy of underreaction events: Post-earnings announcement drift and information noisiness on the Swedish market

Sammanfattning

This paper aims to answer the question of whether there is an existence of post-earnings announcement drift on the Swedish stock market and to what extent it can be explained by information noisiness. A sample of publicly listed firms on the Swedish stock market from 2002 to 2019 is used and the research design includes four different approaches to estimating earnings surprises which is a crucial step in investigating PEAD. These approaches include a time-series model, a seasonal martingale model, analyst forecasts and event-window return. Further, information noisiness is approximated using stock price synchronicity to try to explain what firms are prominent in the drift. The main findings of the paper provide evidence of PEAD in the market, but the length and magnitude vary depending on the choice if earnings surprise estimate. There is a significant drift in the short run with analyst forecasts as basis, and a significant drift in the long run with seasonal martingale estimates. With the event-window return method, the drift is significant over both short and long holding periods where an annualized abnormal return of 11.4% at a 1% significance level is observed over a 12-month holding period. However, the study does not provide any support for the hypothesis that stock price synchronicity is a driver of PEAD. The main results are robust to alterations in the research design and an implementable investment strategy is presented which exploits the market anomaly, generating excess returns for the potential investor.