Earnings News and Market Risk: Is the Magnitude of the Post-Earnings Announcement Drift Underestimated?

The post-earnings announcement drift is the tendency of cumulative abnormal re-turns to drift in the direction of earnings surprise for several weeks after the earnings news is released. We show that a standard approach of measuring abnormal returns by using pre-announcement estimates of market risk (betas) causes the magnitude of this phenomenon to be signi\u85cantly underestimated. Our key \u85ndings are as follows. First, we \u85nd that stock beta tends to rise (fall) following the release of "bad " ("good") earnings news. Second, we \u85nd that by not taking into account post-announcement shifts in betas prior studies are likely to underestimate the magnitude of the drift. A 60-days cumulative abnormal returns on hedge portfolio appear to be approximately 1.4 % higher when the "leverage e¤ect " is incorporated in the estimates of market risk. Our results are robust with respect to di¤erent model speci\u85cations as well as di¤erent earnings surprise measures