Earnings announcement periods are unique periods in the life of each stock. Stocks are under more scrutiny and investors and traders react more actively to all news related to them. And they respond to this activity with higher prices around the dates of the earnings announcements. This premium (the earnings announcement premium) is a substantial anomaly with a monthly strategy earning excess returns of between 7% and 18% per year (with Sharpe ratios larger than other popular anomalies). The return on earnings announcements is essentially unrelated to market risk or any of the other factors commonly used in asset pricing. The premium is strong in large-capitalization stocks, is not only confined to a three-day window around the announcement (but for the whole month), and has appeared consistently since 1927.
The effect could be enhanced by using past volume as a secondary indicator. Stocks with a predictably high announcement volume have a premium of 1.5% per month, which allows one to construct a long/short portfolio generating 18% return per year.
Research hypothesizes that the predictable rise in stock price is driven by the predictable rise in volume around the earnings announcements.
The earnings announcement premium is strongly related to the concentration of past trading activity around earnings announcement dates. In particular, stocks with a high volume around earnings announcements subsequently have both high premiums and high imputed buying by individual investors. This finding suggests that prices for some stocks are pushed higher around announcement dates by buying pressure from individuals.
Confidence in anomaly's validity
Backtest period from source paper
Notes to Confidence in Anomaly's Validity
Period of Rebalancing
Notes to Indicative Performance
per annum, annualized monthly return (arithmetically) of 1.53%, return from table VIII for long-short portfolio of high volume stocks
Notes to Period of Rebalancing
Number of Traded Instruments
Notes to Estimated Volatility
estimated from t-statistic (6,34) from table VIII
Notes to Number of Traded Instruments
more or less, it depends on investor’s need for diversification
Notes to Maximum drawdown
Notes to Complexity Evaluation
Simple trading strategy
The investment universe consists of all stocks from the CRSP database. At the beginning of every calendar month, stocks are ranked in ascending order on the basis of the volume concentration ratio, which is defined as the volume of the previous 16 announcement months divided by the total volume in the previous 48 months. The ranked stocks are assigned to one of 5 quintile portfolios. Within each quintile, stocks are assigned to one of two portfolios (expected announcers and expected non-announcers) using the predicted announcement based on the previous year. All stocks are value-weighted within a given portfolio, and portfolios are rebalanced every calendar month to maintain value weights. The investor invests into a long-short portfolio, which is a zero-cost portfolio that holds the portfolio of high volume expected announcers and sells short the portfolio of high volume expected non-announcers.
Hedge for stocks during bear markets
Not known - Source and related research papers don’t offer insight into correlation structure of proposed trading strategy to equity market risk, therefore we do not know if this strategy can be used as a hedge/diversification during time of market crisis. Strategy is built as a long-short, but it can be split into 2 parts. Long leg of strategy is surely strongly correlated to equity market however short-only leg can be maybe used as a hedge during bad times. Rigorous backtest is however needed to determine return/risk characteristics and correlation.
Frazzini, Lamont: The earnings announcement premium and trading volume
On average, stock prices rise around scheduled earnings announcement dates. We show that this earnings announcement premium is large, robust, and strongly related to the fact that volume surges around announcement dates. Stocks with high past announcement period volume earn the highest announcement premium, suggesting some common underlying cause for both volume and the premium. We show that high premium stocks experience the highest levels of imputed small investor buying, suggesting that the premium is driven by buying by small investors when the announcement catches their attention.
Barber, De George, Lehavy, Trueman: The Earnings Announcement Premium Around the Globe
U.S. stocks have been shown to earn higher returns during earnings announcement months than during non-announcement months. We document that this earnings announcement premium exists across the globe. Using data from 46 countries, we find that the average stock return during earnings announcement months exceeds the return during non-announcement months by over 11 percent annually, after controlling for factors known to be associated with stock returns. The positive incremental return during earnings announcement months is not isolated to a few years; it is significant for 16 of the 20 years of our sample period. Moreover, it is not isolated to a few countries. Of the 20 countries with enough data to conduct a within-country analysis, nine exhibit a significantly positive premium. We also document that the premium for the smallest stocks exceeds that for the largest ones, by roughly 6 percent annually. As to potential explanations for the premium, we find evidence of an increase in the attention paid to firms around the time of earnings releases, creating upward pressure on stock prices. However, there is no evidence that higher levels of systematic or idiosyncratic risk around the time of earnings releases is a significant driver of the premium.
Cohen, Dey, Lys, Sunder: Earnings Announcement Premia and the Limits to Arbitrage
We document that earnings announcement-day premia persist beyond the sample period of earlier studies, over different disclosure environments and remain robust to the refinement of using the expected announcement day rather than the actual announcement day. A portfolio of announcing firms yields returns in excess of the corresponding risk. Excluding announcers from a well-diversified portfolio, while reducing the standard deviation of that portfolio, also reduces its Sharpe ratio, indicating that this strategy results in a less favorable risk-return trade-off. Finally, we provide evidence that the premia are dramatically reduced when the announcement risk is reduced through preannouncements. In addition, we document that the continued presence of this premia is likely to result from limits to arbitrage. These findings are consistent with the view that the announcement period returns are likely to represent compensation for announcement risk.
Johnson, So: Earnings Announcement Premia: The Role of Asymmetric Liquidity Provision
This study examines the link between earnings announcement premia (i.e., higher returns in announcement periods) and changes in liquidity prior to the announcements. Motivated by prior research, we model market makers as holding positive inventories and show they asymmetrically raise costs of providing liquidity to sellers, relative to buyers, to reduce inventory risks ahead of earnings news. This asymmetry gives rise to the announcement premium by increasing the relative cost of trading on negative news. Consistent with our friction-based hypothesis, we show that equity prices predictably rise in the week prior to announcements and gradually decline following announcements. Our model also yields implications of this friction for trading activity, price dynamics, and the information content of prices, all of which we validate in our empirical tests