Post-Earnings Announcement Drift - European evidence on market efficiency and how firm size and economic sector affect the PEAD anomaly

The post-earnings announcement drift (PEAD) is a financial market anomaly disputed by the researchers for 50 years. The main feature of PEAD is that investors appear to underreact to earnings announcements, which causes stock prices to drift in the direction of the earnings news for some time after the announcement. This delayed price response is at face value seen as a violation against the efficient market hypothesis, because the immediate price reaction suggested by efficient market theory remains partly absent. What separates PEAD from other financial market anomalies is the major persistency of it and despite the extensive amount of research, the exact reasons for the anomaly have remained vague. Previous research on the anomaly has mainly focused on the U.S. stock markets, whereas international evidence of PEAD has remained scarce. In addition, most of the previous studies have focused on investor/market behavior and other firm-wise external factors as the drivers of the anomaly, while less attention has been given to the firm-related factors. Thus, the objective of this study was two-fold. First, it was examined whether and to what extent PEAD exists in the European (ex. UK) stock markets based on financial statement information released in 2018. Furthermore, it was explored how firm size and economic sector affect the magnitude and the length of PEAD. The main findings of the study include observing statistically significant PEAD in European (ex. UK) stock markets, especially among the firms who had reported negative news compared to what was expected by the analysts. This result implies an under-reaction to earnings information, which subsequently leads to a delayed price response (PEAD). Regarding the firms who had reported positive news compared to what was expected, an initial over-reaction to the earnings information was observed. After the initial over-reaction, a price correction in the form of negative abnormal returns was found to take place. These results together provide evidence contradicting the efficient market hypothesis. Additionally, firm size was found to be inversely related to the magnitude of PEAD, suggesting that for larger firms, there exists a more immediate price reaction after the earnings announcements. For smaller firms, in turn, the delayed price response was found to be more pronounced. The results of the analysis regarding the effect of economic sector on PEAD were, however, more unambiguous. A significant difference on PEAD was found only between Real Estate and Industrials sectors, a difference that could not be explained with firm size. Moreover, firm size and economic sector were found to be unassociated with the length of PEAD