The persistence of firm-specific post-earnings announcement returns

Abstract

This paper examines whether estimates of post-earnings-announcement returns derived from the historical firm-specific relation between earnings and returns help predict future post-earnings-announcement returns. We find that firms with historically high post-earnings announcement returns continue to exhibit high post-earnings announcement returns following future earnings surprises. This finding stands after controlling for a series of confounding factors. A trading strategy which takes advantage of this firm-specific persistence improves returns by approximately 6.2 per cent, annually after accounting for transaction costs. These results are consistent with investors failing to incorporate past firm-specific experience when pricing current quarter earnings announcements.