Endogenous Disclosures and the Post-Earnings Announcement Drift *

Abstract Disclosures play an apparently critical role in the empirical regularity of the short run momentum and long run reversal in stock returns. Motivated by this evidence, this paper integrates an analysis of disclosures within an asset pricing model, to arrive at a framework where disclosures and asset returns are jointly determined. Disclosures resolve uncertainty, but the increased information flow also raises the risks during the disclosure period. When disclosures and asset returns are modelled jointly, apparently good news is associated with the upward revision of future disclosure risks. The model generates predictions that have the outward appearance of short-run momentum and long-run reversal. * I thank Ray Ball, Ron Dye, Chandra Kanodia, Haresh Sapra, Sri Sridhar and Michela Verardo for comments and advice at various stages of this project. I am also grateful to participants at the 2004 Chicago-Minnesota accounting theory conference, the Xfi conference in Exeter and seminar audiences at Duke, Northwestern, Oxford and Warwick for their insights and comments