ORI GI NAL RESEARCH

Market uncertainty, market sentiment,

and the post-earnings announcement drift
Ron Bird

Daniel F. S. Choi

Danny Yeung
Springer Science+Business Media New York 2013
Abstract Post-earnings announcement drift (PEAD) which was rst identied over
40 years ago seems to be as much alive today as it ever was. Numerous attempts have been
made to explain its continued existence. In this paper we provide evidence to support a new
explanation: that the PEAD is a reection of the level of market uncertainty and sentiment
that prevails during the post-announcement period. The overriding conclusion from our
analysis is that both uncertainty and sentiment play a central role in determining investor
behaviour and it is this behaviour that ultimately determines the pricing that is observed in
nancial markets.
Keywords Anomalies Post-earrings announcement drift Uncertainty Sentiment
JEL Classication G12 G14 D81
1 Introduction
Post-earnings announcement drift (PEAD) is the oldest continuing market anomaly, dating
back to the rst event study published over 40 years ago (Ball and Brown 1968). Ball
(1978) notes that at least 20 papers in the decade post-Ball and Brown found evidence of a
PEAD. If we move forward almost 35 years, empirical studies are still nding evidence of
a PEAD with stocks reporting that good news continues to be associated with positive
excess returns for an extended period beyond the earnings announcement date and bad
R. Bird (&) D. Yeung
Paul Woolley Centre for the Study of Capital Market Dysfunctionality, University of Technology
Sydney, Sydney, Australia
e-mail: ron.bird@uts.edu.au
D. Yeung
e-mail: danny.yeung-1@uts.edu.au
R. Bird D. F. S. Choi
Waikato Management School, The University of Waikato, Hamilton, New Zealand
e-mail: dfschoi@waikato.ac.nz
1 3
Rev Quant Finan Acc
DOI 10.1007/s11156-013-0364-x
news continues to realise negative excess returns for an extended period (Ali et al. 2008;
Konchitchki et al. 2010; Forner et al. 2009). A number of authors have suggested that
PEAD (along with momentum), having proved robust across time, markets and method-
ologies (e.g., Fama 1998; Kothari 2001), represents the most serious challenge to the
Efcient Market Hypothesis (EMH).
Since Ball (1978), a continuing stream of authors has attempted to explain PEAD, either
within a rational expectations framework or by appealing to behavioural explanations.
Explanations proposed include arbitrage risk (Mendenhall 2004), liquidity risk (Sadka
2006), and unsophisticated investors (Bartov et al. 2000). Two explanations that have
gained much attention in recent years have been information uncertainty (Francis et al.
2007) and investor sentiment (Livnat and Petrovitis 2009). The underlying proposition in
both cases is that the uncertainty or sentiment at the time of the information release impacts
on the market reaction at that time with the PEAD representing the subsequent market
correction to the initial mispricing. For example, high uncertainty or low sentiment will
result in an initial underreaction to good news with the subsequent upward drift (i.e.
PEAD) representing the market correction to this initial underreaction.
Recent studies nd evidence of an asymmetric response at the time of information
release, with the market reacting more to bad news than to good news. One line of research
attributes the asymmetry to the pessimism induced by the level of uncertainty at the time
the information becomes available (Williams 2009; Kim et al. 2010; Bird and Yeung
2012). A second line of research nds that the market sentiment at the time of the
information release also results in an initial asymmetric response to information. Mian and
Sankaraguruswamy (2008) and Jiang (2011) both nd that markets are more responsive to
good news at the time of its release when sentiment is high and more responsive to bad
news when sentiment is low.
Bird and Yeung (2012) examine the combined impact of market uncertainty and market
sentiment on how investors react to information. The usual presumption is that investors
react positively to good news and negatively to bad news. However, Bird and Yeung nd
that investors largely ignore bad news if it is released at a time when market uncertainty is
low and market sentiment is high, while investors actually react negatively to good news
when it is released at a time when market uncertainty is high and sentiment is low. In the
spirit of Francis et al. (2007) and Livnat and Petrovitis (2009), this would suggest the
potential for signicant PEAD depends on the levels of uncertainty and sentiment at the
time of the information release.
Previous empirical studies have highlighted that the PEAD is impacted by the level of
uncertainty and/or by the sentiment at the time of the information release. In this paper we
extend these ndings by evaluating the combined effect on the PEAD of the prevailing
uncertainty and sentiment over the post-announcement period. Therefore, our study differs
from those that come before in two important ways: (i) it is the rst to examine the
combined effect of uncertainty and sentiment on the PEAD, and (ii) it is the rst to
examine the impact of uncertainty and sentiment over the post-announcement period rather
than just at the time of the information release.
We nd signicant evidence that during the post-announcement period: (i) the strongest
downward drift after a bad earnings announcement occurs when uncertainty is high and
sentiment is low, and (ii) the strongest upward drift following good news announcements
occurs during periods when uncertainty is low and sentiment high. The best example of the
combined impact of prevailing uncertainty and sentiment on the PEAD is our nding that
there is a strong downward drift after the release of good news during periods when
uncertainty is high and sentiment is low.
R. Bird et al.
1 3
Our results also contribute to our understanding of what inuences the speed with which
the market adjusts to information releases. By conrming the existence of a PEAD, our
ndings support previous evidence that the market typically underreacts to most infor-
mation sources including both good news and bad news earnings announcements
(Kadiyala and Rau 2005). Such a conclusion is at variance with those of other studies
which nd evidence that there is a greater initial response to bad news than good news at
times of high uncertainty, and suggest that this is because investors take a pessimistic view
at such times and so underreact to good news but overreact to bad news (Williams 2009;
Kim et al. 2010). This pessimism is being driven by investors following maxmin expected
utility (MEU) and so they base their decisions on the worst case outcomes at times of high
uncertainty (Gilboa and Schmeidler 1989).
We do nd evidence that, consistent with MEU, there is a larger downward drift during
the announcement period after bad news than an upward drift after good news and that this
asymmetry increases as uncertainty increases. However, we also nd that the initial
reaction at the time of the earnings announcement represents a higher proportion of the
total adjustment over the 60 trading days post the announcement in the case of good news
announcements as compared to bad news announcements. In other words we nd evidence
of both a greater response to bad news as compared to good news at the time of the
information release but also evidence to suggest that the initial underreaction to bad news
is greater than what it is for good news. Both of these seemingly inconsistent ndings are
strengthened when the information is released at a time of high market uncertainty and are
explained by the fact that overall there is a much greater adjustment to bad news than there
is to good news.
The remainder of the paper is structured as follows: Section 2 reviews the PEAD
literature, concentrating on the explanations postulated to explain its existence. Section 3
sets out the data and methodology employed in the study. Section 4 reports and discusses
the ndings. Section 5 presents the concluding remarks and discusses possible future work
in the area.
2 Literature review on post-earnings announcement drift
Informationefciencyimplies that markets quicklyimpoundinformationintoprices. However,
much of the empirical evidence indicates that the adjustment process can be quite slow,
extending over several months or in some cases, several years. Ball and Brown (1968) were the
rst to identify a continuing drift in returns subsequent to an announcement (PEAD) and Ball
(1978) notes that PEAD was apparent in at least 20 studies conducted over the next decade.
Today, the continuing existence of PEAD remains an anomaly, as evidenced by the recent
ndings of Ali et al. (2008), Konchitchki et al. (2010) and Forner et al. (2009). Therefore, it is
not surprising that Kothari (2001) concluded his survey paper by saying the PEAD anomaly
poses a serious challenge to the efcient markets hypothesis. It has survived a battery of tests
and many attempts to explain it away.
Over the last 35 years we have seen a continuing stream of papers that attempt to
explain the PEAD, with many such as Ball (1978) drawing upon model misspecication
and other reasons to argue that it does not necessarily represent a departure from the EMH.
In contrast, Barnard and Seyhun (1997) using a stochastic dominance approach put aside
the model misspecication argument and suggest that it is difcult to present a case that
PEAD does not represent a departure from the EMF. One explanation for the PEAD
phenomenon is that good news companies are inherently more risky than bad news
The post-earnings announcement drift
1 3
companies (Bernard and Thomas 1989). Bernard and Thomas conclude that at best, risk
could explain only a small proportion of the PEAD and this conclusion has gone largely
unchallenged. Another line of explanation dating back to Ball (1978) argues that the PEAD
is just an artefact of the methodology and/or the data employed to calculate abnormal
returns rather than an indication of any market inefciency (Jones and Litzenberger 1970;
Jacob et al. 2000). However, the results have remained robust despite the use of numerous
alternative methodologies and the data problems are no longer a concern. Another pos-
sibility is that difculties in implementation and/or transaction costs could mean that it is
impossible to prot from the perceived opportunities to exploit the PEAD. This seems
unlikely as Bernard and Thomas (1989) demonstrate how the PEAD can be exploited
following a very low turnover strategy. However, more recent studies have suggested that
the PEAD may at least be partially explained by the high costs of arbitrage (Mendenhall
2004), and liquidity-related risk (Sadka 2006).
All explanations for the PEAD discussed to date are attempts to reconcile the evidence
on PEAD with the efcient markets hypothesis. One proposal suggestive of inefciencies
in markets is that investors just get it wrong and consistently underreact to both good and
bad earnings news. Bernard and Thomas (1990) suggest that investors adopt a very na ve
approach when evaluating new earnings numbers and fail to recognise their full implica-
tions for future earnings. This explanation is consistent with the possibility that less
sophisticated investors might be driving the PEAD. Bartov et al. (2000) provide some
support for this premise when they nd a negative relationship between the level of
institutional holdings (sophisticated investment) and the level of the PEAD. Other authors
have taken a behavioural approach and attempted to explain the PEAD as being due to one
or more of the cognitive biases attributed to investors. Examples of this include Frazzini
(2006) who demonstrates a link between PEAD and the disposition effect and Barberis
et al. (1998) who explain it in terms of conservative and representativeness biases.
Clearly we are far from achieving closure as to the factors that drive the continued
existence of the PEAD. One recent explanation that we are yet to consider is that the PEAD
is driven by investor uncertainty as to how to interpret information. The argument is that
investors uncertainty about the quality of an information signal causes them to underreact
at the time of the release of the information, and as uncertainty is resolved, we will begin to
see the full reaction to the information and so the PEAD is created.
1
A number of studies
provide empirical support for this proposition by conrming that information uncertainty is
positively related to the magnitude of the PEAD (Zhang 2006; Francis et al. 2007;
Anderson et al. 2007; Angelini and Guazzarotti 2010).
Another line of research has examined the impact of sentiment on the PEAD (Livnat
and Petrovitis 2009) with similar reasoning that the initial reaction to the release of
information will be conditioned by the sentiment in the market and the PEAD reects a
subsequent price adjustment. For example, Mian and Sankaraguruswamy (2008) and Jiang
(2011) both nd that there is a stronger reaction to good news when the information is
released at a time when sentiment is strong. Consistent with these results, Livnat and
Petrovitis (2009) nd a greater positive PEAD following a good news announcement made
when market sentiment is weak than when market sentiment is strong.
One unique feature of this study is that we measure the impact of market uncertainty
(and sentiment) by how investors react to information over the post-announcement period.
Previous studies have considered uncertainty at the rm level, basing their measure of
uncertainty on factors such as the companys use of accruals, its size, its return volatility
1
The conceptual argument for this proposition can be found in Caskey 2009.
R. Bird et al.
1 3
and the dispersion of analysts earnings forecasts. The value of a company at any time is
contingent on the inuence of thousands of factors which impact on the future protability
and risk characteristics of the rm. The ability of investors to cope with all of these factors
varies signicantly over time and becomes extremely difcult in the aftermath of certain
events such as the 9/11 disaster, the collapse of Lehman Brothers, and the threats to the
viability to the European Economic Union. The thesis of this paper is that the interpretation
that the market places on any information is conditioned by the level of market uncertainty
at the time of, and subsequent to, the information release.
Another unique feature of this paper is that it looks at the combined effect of market
uncertainty and market sentiment on the price behaviour of a stock during the post-
announcement period. Bird and Yeung (2012) is the only paper that has considered the
combined effect of market uncertainty and sentiment on how investors react to information
at the time of its release. In this paper we extend this analysis to examine how uncertainty
and sentiment work together to explain the PEAD, and whether they have separate effects
or whether one just proxies for the other.
The third unique feature of this paper is that it examines the importance of the pre-
vailing market uncertainty and market sentiment during the post-announcement period in
explaining the PEAD. Previous studies have only considered the impact that uncertainty or
sentiment at the time of the information release has on initial price adjustment to the
information and so gives rise to the mispricings that are the basis for the subsequent price
adjustments. This might be a satisfactory way to address the general question of why there
is a PEAD but fails to adequately explain the post-announcement price behaviour of
particular stocks. We propose that the behaviour of particular stocks will also be inuenced
by the prevailing level of market uncertainty and sentiment during the post-announcement
period.
3 Data and methodology
The research question in this paper is: Does the level of both market uncertainty and
market sentiment prevailing over the post-announcement period impact on the price
behaviour of the stock during this period (i.e., the PEAD)? To answer this question we will
test the following hypotheses:
Hypothesis 1 High market uncertainty during the post-announcement period will
increase the downward drift associated with a bad news announcement but mitigate the
upward drift associated with a good news announcement.
Hypothesis 2 High market sentiment during the post-announcement period will tends to
nullify any PEAD associated with bad news stocks and magnify any PEAD associated with
good news stocks.
In other words we are proposing the prevailing market uncertainty and sentiment over
the post-announcement period will play a major role in explaining the PEAD. Studies have
shown that different market conditions can elicit different investor reactions to identical
events (Klein and Rosenfeld 1987; Docking and Koch 2005) and that the timing of the
information release will also affect the reaction because of uncertainty resolution
(Sharathchandra and Thompson 1995; Eden and Loewenstein 1999). High sentiment
creates a climate of optimism (Baker and Wurgler 2006), while uncertainty breeds pes-
simism. So the twin forces of sentiment and uncertainty will tend to counteract each other.
The post-earnings announcement drift
1 3
In our analysis we will also provide insights into the relative importance of the levels of
uncertainty and sentiment at the time of the announcement as compared with the levels of
uncertainty and sentiment prevailing during the post-announcement period.
By examining the relationship between market uncertainty and market sentiment over
sixty trading days post-announcement,
2
we will provide useful insights into a number of
other important questions:
Is the initial response of the market to new information consistent with market
efciency?
Is the initial market response to new information an underreaction or an overreaction,
and to what extent does this response vary depending on whether news is good or bad?
Is there an asymmetric response to bad and good news during the post-announcement
period?
Is the market better at quickly incorporating one type (bad or good) of information into
prices than it is the other type?
3.1 Data
The sample period used in this study extends from January 1986 to September 2009. We
use three types of data: data from the equity market, data from the options market, and
accounting data. The return data from the equity market were obtained from CRSP through
WRDS. Our measure of market uncertainty is the Implied Volatility Index (VIX) from
CBOE.
3
The accounting data which includes reported earnings were obtained from the
CRSP/COMPUTSTAT merged database which is sourced through WRDS. Finally,
information on actual earnings and nancial analysts earnings forecasts were sourced from
the IBES summary.
To be included in the nal sample, we required the rms to have issued earnings
announcements in each of the previous ve quarters. We also required information on rm
characteristics (such as book-to-market and rm size), VIX and rm returns at the time of
the earnings announcements. Finally, in order to reduce the impact of outliers, rm
characteristics have been trimmed at the 1st and 99th percentiles.
In the following section, we provide a brief discussion of the calculation of the three
major variables used in our study: (i) unexpected earnings, (ii) market uncertainty, and
(iii) market sentiment:
3.1.1 Unexpected earnings (UE)
The study revolves around evaluating stocks returns in the period after the release of an
earnings announcement. More specically, we study how uncertainty and sentiment play
vital roles in determining the PEAD. Central to our analysis is the unexpected component
of the earnings announcement which we measure as the difference between the actual EPS
and the consensus earnings estimate in the month immediately prior to the announcement
(Han and Wild 1990; Francis et al. 2007; Kaestner 2006). So the unexpected portion of the
earnings announcement of rm i can be expressed as:
2
We also examined the same relationship over the 30 trading days post announcement period and the
results were basically unchanged.
3
For a detailed explanation of the calculation of the PEAD, see Williams (2009).
R. Bird et al.
1 3
Unexpected earnings
i
Actual EPS
i
Expected earnings
i
where Expected Earnings is dened as the Consensus EPS Estimate for rm i.
Consistent with the literature (Kaestner 2006), we scaled the unexpected earnings by the
absolute value of actual EPS to arrive at our nal measure of unexpected earnings.
4
The
scaled unexpected earnings measure is therefore:
UE
i

Actual EPS
i
Expected EPS
i
Actual EPS
i
The scaling of the unexpected earnings standardises earnings surprises across our
sample and thus allows us to examine the inuence of news on the returns of the rms.
5
A
positive unexpected earnings event (PUE) occurs when the earnings just announced exceed
expected earnings. Similarly, a negative unexpected earnings event (NUE) occurs when the
earnings just announced fall short of expected earnings.
3.1.2 Market uncertainty
Using a suitable proxy for market uncertainty is critical in this paper. Francis et al. (2007)
have used the quality of information emanating from a rm as indicated by its use of
accruals to proxy for uncertainty, while others have used disagreement among experts such
as analysts as a measure of the difculty market participants had in interpreting the
implications of the information (Barron et al. 1998; Zhang 2006). However, all these
proxies are designed to measure uncertainty at the rm level whereas we required a
market-wide measure of uncertainty. Anderson et al. (2009) obtain such a measure by
aggregating the analysts earnings forecasts for all rms and using the dispersions in these
aggregated forecasts as a quarterly macro-measure of uncertainty. However, Anderson
et al.s measure cannot be calculated on the daily basis required in this study.
6
In this study,
we have measured uncertainty by the implied volatility from the options market (i.e. VIX)
which is used by Williams (2009), Drechsler (2009), Bird and Yeung (2012), and Kim
et al. (2010), as this is available on a daily basis.
7
Although some critics have suggested
that VIX provides an estimate of risk rather than uncertainty, we contend that recent
studies suggest otherwise. Drechsler (2009) provides support for VIX through a general
equilibrium model that incorporates time-varying Knightian uncertainty. The model
explains that a large hedging/variance premium is evidenced in stock markets. Drechsler
argues that the large time-varying option premium (reected in the implied volatility) is
consistent with investors using options for protection against uncertainty (and time-
variation in uncertainty). He shows through calibration that uctuations in the variance
premium reect changes in the level of uncertainty.
4
We also tried several other measures of unexpected earnings, including the unscaled unexpected earnings
and SUE the unexpected earnings standardised by the standard deviation of analysts estimates with similar
ndings.
5
Both Williams (2009) and Bird and Yeung (2012) adopted a similar methodology to standardise earnings
surprises prior to analysing the impact of uncertainty on investors behaviour.
6
Another problem with the uncertainty proxy used by Anderson et al. (2009) is that it can be affected by a
number of other factors such as the heterogeneous beliefs of the analysts.
7
VIX is calculated continually through the day but we use the level of VIX as at the end of each day.
The post-earnings announcement drift
1 3
3.1.3 Market sentiment
High investor sentiment has the potential to mitigate some of the negative effects of
uncertainty. Baker and Wurgler (2007) have developed a model for measuring the overall
level of investor sentiment and used this measure to establish that investors take an overly
optimistic stance to pricing stocks when sentiment is high but they take a much more
subdued stance when sentiment is low. The problem in using the Baker and Wurgler
sentiment index is that it cannot be calculated with sufcient frequency to capture short-
term variations in sentiment through time. As we wish to capture sentiment at the market
level we use the S&P 500 index returns realised over the post-announcement period to
proxy for sentiment.
3.2 Methodology
The basic model used in our analysis to establish the association between the PEAD and
unexpected earnings is:
R
it
b
o
b
1
NUE
it
b
2
PUE
it
b
3
log MV
it
b
4
BTMV
it
Year Effects e
it
1
where R
it
denotes the accumulated excess return
8
over the post-announcement period
which commences on the second day after the announcement and ends on the 60th trading
day after the announcement (i.e., t ? 2 to t ? 60).
9
PUE is calculated by multiplying the unexpected earning by a dummy variable which
takes the value of 1 if there are positive earnings surprises and 0 otherwise. Similarly, a
negative unexpected earnings (NUE) event occurs when the earnings just announced fall
short of expected earnings. So if UE[0, PUE = UE, otherwise PUE = 0. MV represents
the market capitalisation at the time of the announcement and is measured in millions.
BTMV measures the book-to-market value of the rm at the time of the announcement.
With no drift, the coefcients b
1
and b
2
are expected to be not signicantly different
from zero.
We next test the extent to which the level of PEAD is affected by the level of uncertainty
(VIX) at the time of the announcement and the extent to which uncertainty changes (DVIX)
over the post-announcement period. In order to do this, we determine the level of VIX at the
time of each announcement and the change in VIX over the post-period. We expand Eq. (1) to
incorporate these two additional variables into the following regression equation:
R
it
b
o
b
1
NUE
it
b
2
PUE
it
b
3
X
1
NUE
it
b
4
X
1
PUE
it
b
5
X
2
NUE
it
b
6
X
2
PUE
it
b
7
log MV
it
b
8
BTMV
it
Year Effects e
it
2
where X1 = 1 when rm i makes an earnings announcement at time t and the level of
uncertainty (level of VIX) at time t is above the median level of VIX when all levels of
VIX are ranked from low to high; otherwise, X1 = 0; X
2
= 1 where there is an increase in
the level of VIX over the post-announcement period (as measured by the difference
8
The excess return is calculated on a daily basis as the difference between the daily return on a particular
stock and the daily return on the S&P500 index.
9
We also undertook the same analysis using a post-announcement period extending from the second day
after the announcement to the 30th trading day after the announcement. As the ndings were the same we
only report our ndings for the longer post-announcement period.
R. Bird et al.
1 3
between the level of VIX at the time of announcement, VIX
t
, and the level of VIX 60 days
post announcement, VIX
t?60
); otherwise X
2
= 0.
We will dene high uncertainty as being where the level of VIX is above the median
level at the time of the announcement and increases over the post-announcement period.
Similarly we dene low uncertainty being where the level of VIX is below the median
level at the time of the announcement and decreases over the post-announcement period.
We next expand our analysis to incorporate market sentiment into the analysis. We do
this by introducing as an additional variable the momentum over the post-announcement
period. Our expanded regression equation is set out below:
R
it
b
o
b
1
NUE
it
b
2
PUE
it
b
3
X
1
NUE
it
b
4
X
1
PUE
it
b
5
X
2
NUE
it
b
6
X
2
PUE
it
b
7
X
3
NUE
it
b
8
X
3
PUE
it
b
9
X
4
NUE
it
b
10
X
4
PUE
it
b
11
log MV
it

b
12
BTMV
it
Year Effects e
it
3
where X
3
= 1 if the return on the S&P 500 Index from t ? 2 to t ? 60 is in the second
tercile when all S&P 500 Index returns {t ? 2, t ? 60} are ranked from low to high;
otherwise X
3
= 0; X
4
= 1 if the return on S&P 500 Index returns from t ? 2 to t ? 60
ranks in the third tercile where all S&P 500 Index returns {t ? 2, t ? 60} are ranked from
low to high; otherwise X
4
= 0.
The nal part of our analysis involves separating two sub-samples from our total
sample. One sub-sample comprises those announcements made at a time when the market
uncertainty was in the lowest tercile, and the market sentiment was in the highest tercile,
across our whole sample. These are the conditions where we would expect to see the
greatest initial market response to good news and the lowest market response to bad news.
Based on the ndings of previous research, we would expect for this sub-sample to see a
much larger PEAD associated with bad news than with good news.
The other sub-sample comprises those earnings announcements made at a time when the
market uncertainty was in the highest tercile, and the market sentiment was in the lowest
tercile, across our whole sample. These are the conditions where we would expect the
greatest initial market response to bad news but the most muted market response to good
news. Based on the initial price adjustment, we would expect to see for this sub-sample a
much larger PEAD associated with good news than with bad news.
We complete the analysis by analysing the impact of the market uncertainty and sen-
timent prevailing over the whole post-announcement period on the PEAD experienced by
the stocks in each of the two sub-systems. By so doing we have a great opportunity to
examine how these post-announcement conditions impact on the PEAD experienced by
individual stocks (both in absolute terms and relative to the impact of the level of
uncertainty and sentiment at the time of the announcement). The regression equation that
we investigate for each sub-sample is:
R
it
b
o
b
1
NUE
it
b
2
PUE
it
b
5
X
2
NUE
it
b
6
X
2
PUE
it
b
7
X
3
NUE
it
b
8
X
3
PUE
it
b
9
X
4
NUE
it
b
10
X
4
PUE
it
b
11
log MV
it
b
12
BTMV
it
Year Effects e
it
4
where: X
2
= 1 where there is an increase in the level of VIX over the post-announcement
period (as measured by the difference between the level of VIX at the time of
announcement (VIX
t
), and the level of VIX 60 days post announcement (VIX
t?60
));
otherwise, X
2
= 0; X
3
= 1 if the return on the S&P 500 Index from t ? 2 to t ? 60 ranks
The post-earnings announcement drift
1 3
in the second tercile when all S&P 500 Index returns {t ? 2, t ? 60} are ranked from low
to high; otherwise X
3
= 0; X
4
= 1 if the return on S&P 500 Index from t ? 2 to t ? 60
ranks in the third tercile where all S&P 500 Index returns {t ? 2, t ? 60} are ranked from
low to high; otherwise X
4
= 0.
3.2.1 Summary statistics
Our nal sample set comprises 325,888 observations of quarterly earnings announcements.
Summary statistics for our nal sample are reported in Table 1. It can be seen that the
magnitude of bad news is approximately twice as large as it is for good news with this
proportion remaining fairly constant across all levels of uncertainty (VIX) and sentiment
(MOM). There is only a slight variation in the size of the rms making announcements
across the various sub-samples, the major departure being the preponderance of smaller
rms that make earnings announcements at times when uncertainty is low. Finally, the
greatest variation highlighted in Table 1 is that growth stocks are far more likely than value
stocks to release their earnings gures during periods when markets are experiencing low
uncertainty.
4 Empirical results
In this section, we show that our empirical results afrm the existence of a PEAD in our
sample data, that the PEAD is inuenced by the level of market uncertainty and market
sentiment prevailing over the post-announcement period, and that the PEAD for small cap
and growth stocks is both greater and more impacted by the joint effects of uncertainty and
sentiment than large cap and value stocks.
4.1 PEAD
The rst question that we address is whether there is a post-earnings announcement drift in
our data. In order to evaluate this we applied our data to Eq 1. The coefcients reported for
NUE and PUE in Table 2 are both signicant and positive. Our ndings thus conrm the
existence of a PEAD and of the signs expected to be associated with the release of good
and bad earnings news.
10
The most interesting nding is that the magnitude of the coef-
cient attached to the bad news announcements is signicantly larger to that attached to the
good news announcements. The implication of this nding is that the market underreacts to
both bad and good news earnings announcements but there is a greater underreaction to
bad news than to good news. In order to investigate this further we ran the same regression
as for Table 2 but this time with excessive return over the 3-day announcement variables
(i.e. t - 1 to t ? 1) as the dependent variable. We found the coefcient on both NUE and
PUE to be positive and highly signicant with little difference in their magnitude. By
comparing these coefcients to those reported in Table 2, we conclude that about half of
10
As can be seen from Table 2, the coefcients attached to both the control variables are signicant. Indeed
in all of our egressions there is a positive coefcient attached to the size variable and a signicant negative
coefcient attached to the value/growth variable. In the interest of clear exposition, we do not report the
coefcient for these variables in future tables.
R. Bird et al.
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The post-earnings announcement drift
1 3
the reaction of the market to bad news over the 62 trading days inclusive of the
announcement period occurred during the announcement period, whereas in the case of
good news two-thirds of the reaction took place during the announcement period. This
nding is also consistent with a slightly larger underreaction to bad news than to good
news.
4.2 Market uncertainty at the time of the announcement
Although previous studies conclude that the market response to the release of information
is impacted by the level of uncertainty at the time, there is disagreement as to the nature of
this impact. Some studies claim that uncertainty causes investors to underreact to both bad
and good news, with the PEAD reecting a subsequent adjustment to the information (e.g.,
Francis et al. 2007) whereas other studies claim that uncertainty causes investors to take a
pessimistic stance and so overreact to bad news and underreact to good news (e.g., Williams
2009). Although these two explanations both suggest a subsequent upward adjustment to
good news, the former suggests a further downward adjustment following a bad news
announcement while the latter suggests a correction with a subsequent drift upwards in price
(e.g., Francis et al. 2007; Williams 2009; Bird et al. 2011). We evaluate these propositions by
running the following regression which is a reduced form of Eq. 2:
R
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it
Year Effects e
it
Table 2 Analysis of post-earnings announcement drift (PEAD)
Variable Coefcient
NUE 0.0151***
PUE 0.0091***
Ln(MV) -0.0022***
BTMV 0.0079***
Test of difference NUE[PUE***
The above table reported the basic results for the basic regression (or Eq. 1): R
it
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Year Effects e
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The dependent variable, R
it
, is the accumulated excess return over the post-announcement period which
commences on the second day after the announcement and ends on the 60th trading day after the
announcement (i.e., t ? 2 to t ? 60). The unexpected portion of an earnings announcement is dened as the
difference between the actual earnings and the consensus earnings estimate in the month immediately prior
to announcement. We scaled the unexpected portion of the earnings announcement by the actual earnings
announced to arrive at our nal measure of unexpected earnings. PUE are events where the announced
earnings are greater than the consensus analyst forecast earnings. PUE is calculated by multiplying the
unexpected earning by a dummy variable which takes the value of 1 if there are positive earnings surprises
and 0 otherwise. Similarly, a negative unexpected earnings (NUE) event occurs when the earnings just
announced fall short of the consensus analyst forecast earnings. PUE are events where the announced
earnings are greater than the expected earnings where median analysts forecast earnings. PUE is calculated
by multiplying the unexpected earning by a dummy variable which takes the value of 1 if there are positive
earnings surprises and 0 otherwise. Similarly, a negative unexpected earnings (NUE) event occurs when the
earnings just announced fall short of expected earnings. MV represents the market capitalisation at the time
of the announcement and is measured in millions. BTMV measures the book-to-market value of the rm
making the announcement. Yearly xed effects are included but not reported in the results. The notations
***, ** and * denote statistical signicance at the 1, 5 and 10 % levels respectively
R. Bird et al.
1 3
Our ndings reported in Table 3 indicate that there is a signicant and positive PEAD
associated with both bad and good news irrespective of whether uncertainty is low or high
at the time of the announcement. Consistent with expectations, bad news has a greater
PEAD when the announcement is made at a time of high market uncertainty, whereas there
is a greater positive PEAD associated with good news when the announcement is made at a
time of low uncertainty. Further, the PEAD associated with a bad news announcement is
always larger than that associated with a good news announcement but this difference is
only signicant in those cases when uncertainty is high at the time of the announcement.
Two important insights can be drawn from our empirical ndings. First, the evidence
conrms that the PEAD is higher, particularly for bad news, when the news is released at a
time when market uncertainty is high. Second, we nd the same asymmetric response to
bad news and good news in the post-announcement period when market uncertainty is
high. This is the same phenomenon that others have noted with respect to the market
reaction at the time of the release of the information. To conclude, the evidence conrms
the proposition that the market underreacts to both good and bad earnings announcements
and that the PEAD over the subsequent 60 trading days is greater in the case of bad news,
particularly when high uncertainty prevails at the time of the information release. These
ndings thus challenge the validity of market efciency and suggest that investors faced
with high uncertainty as to how factors will evolve in the future will fail (even more) to
realise the importance of new information as is evidenced by the trend that the market
follows in the post-announcement period.
4.3 Changes in uncertainty over the post-announcement period
It is evident from the previous analysis that the level of uncertainty at the time of an
earnings announcement impacts on the magnitude of subsequent PEAD. We now examine
the extent to which the level of uncertainty prevailing over the post-announcement period
impacts on the magnitude of PEAD. In order to evaluate this issue, we apply the sample
data to Eq. 2. In Table 2, the coefcient for NUE is 0.0151, indicating that on average
there is a signicant downward drift after bad news announcements. From Table 4, when
uncertainty (VIX) starts low and decreases during the post-announcement period, the
coefcient for NUE reduces to 0.0081, indicating a less than average downward drift. In
contrast, when uncertainty starts high and increases during the post-announcement period,
the coefcient for NUE is 0.0226. So once again there is a signicant downward drift but
this time one that is well above the average. It is interesting to note that in those instances
when uncertainty is low at the time of the announcement but subsequently rises, and in
those instances when it is high at the time of the announcement but subsequently falls, the
coefcients are almost identical to the average of 0.0151. In addition to conrming a
general underreaction to information at the time of its release, these results underline the
importance of the level of uncertainty over the post-announcement period in determining
the magnitude of the PEAD after a bad news announcement.
In Table 2, the coefcient for PUE is 0.0091, indicating a signicant upward drift after
good news announcements. From Table 4, it is apparent that the level of uncertainty over
the post-announcement period has an even greater impact on PEAD after a good news
announcement than it does after a bad news announcement. When uncertainty (VIX) starts
low and decreases, there is a much larger than average upward drift over the post-
announcement period (i.e., the coefcient of PUE = 0.0215) with the correction to an
initial underreaction unmitigated by the negative impact that high market uncertainty can
have on investor behaviour. When we examine the PEAD after a good news announcement
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R. Bird et al.
1 3
over a period when market uncertainty (VIX) starts high and increases, we now see a
reversal of the drift which is now downward and signicant (the coefcient of PUE =
-0.0055). In other words, the negative impact that high uncertainty can have on investor
behaviour is sufcient to offset the normal upward drift associated with a correction to an
initial underreaction to the good news announcement. Indeed, the importance of the level
of uncertainty prevailing during the post-announcement period for determining the nature
of the subsequent drift is highlighted by the fact that there is almost no drift associated with
a good news announcement made at a time when uncertainty is low if it subsequently rises
during the post-announcement period (the coefcient of PUE = 0.0015). Our ndings
highlight that there is a difference between the path that a stock price follows after an
initial underreaction to a news announcement depending on whether the news is good or
bad: overall, the path of the stock price is impacted even more by the prevailing uncertainty
during this post-announcement period if the news is good.
We previously found that investors underreact to both good and bad news announce-
ments, especially when the announcement is made at a time of high market uncertainty.
We have nowfound that the PEADassociated with a correction to the initial underreaction is
signicantly affected by the level of uncertainty that prevails over the post-announcement
period. In the case of a bad news announcement, the effect of high uncertainty is to heighten
the typical downward drift. However, in the case of a good news announcement, the effect of
high uncertainty is to negate and even reverse the more typical upward drift during the post-
announcement period.
4.4 Market sentiment
Our second proposition is that in addition to uncertainty, market sentiment will have an
impact on the PEAD. We divided our sample on the basis of the level of sentiment
prevailing over the post-announcement period, with high sentiment being when market
momentum is strong and low sentiment being when it is weak. In order to evaluate this
proposition, we apply our sample data to Eq. 3. Based on the information contained in
Table 5, it can be seen that there is always a downward drift after a bad news earnings
announcement irrespective of the level of market uncertainty and the level of market
sentiment prevailing over the post-announcement period (i.e. all of the coefcients are
positive and signicant). As already noted, the greatest downward drift occurs when high
uncertainty prevails over the post-announcement period and this can be seen from Table 5.
The downward drift is stronger after bad news announcements when low sentiment pre-
vails (with the difference between high and low sentiment for any given level of uncer-
tainty being signicant at the 10 % level). The combined effect of uncertainty and
sentiment can be seen when we compare the coefcient attached to NUE when uncertainty
is high and sentiment is low (0.0237) with the coefcient attached to NUE when uncer-
tainty is low and sentiment is high (0.0066). The difference is signicant at the 1 % level
and highlights the extent to which both uncertainty and sentiment impact on the PEAD
after bad news, with the negative drift when uncertainty is high and sentiment is low being
four times greater than when uncertainty is low and sentiment is high.
The ndings with respect to PEAD after a good news announcement are similar, though
more complicated, than those reported above for bad news announcements. As is the case
with bad news, high uncertainty during the post-announcement period is shown to have a
negative impact on investors and this translates into a lower, indeed negative, PEAD (e.g.
the coefcient for high uncertainty and low sentiment is -0.0140). We can now see from
the information presented in Table 5 that sentiment has a larger impact on the markets
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1 3
post-earnings responses to good news than it does to post-earnings responses to bad news.
In fact, there is always an upward drift after a good earnings announcement when market
sentiment is strong over the post-announcement period, irrespective of what level of
market uncertainty prevails. Perhaps even more interesting is that the drift during the post-
announcement period after the release of good news is always negative when market
sentiment is low, again irrespective of the prevailing level of uncertainty. The combined
effect of uncertainty and sentiment can be seen when we compare the extent of the upward
drift following a good news announcement when uncertainty is low and sentiment is high
(coefcient = 0.0301) with the extent of the downward drift when uncertainty is high and
sentiment is low (coefcient = -0.0140). The difference is signicant at the 1 % level and
this highlights that the combination of the prevailing market uncertainty and sentiment
over the post-announcement period has a much greater impact on the PEAD after good
news than it does after bad news, although both are highly signicant. Further, post-
announcement sentiment is more important in explaining the PEAD than is the level of
uncertainty at the time of the announcement.
That market uncertainty and sentiment over the post-announcement period has a much
greater impact on the PEAD after good news than it does after bad news requires further
comment. Studies have shown that a large difference exists between how individuals react
and update their behaviour following good news and bad news (Akhtar et al. 2011; Akhtar
et al. 2012; Eil and Rao 2011). Both Akhtar et al. (2011) and Akhtar et al. (2012) highlight
the existence of a negativity bias where investors pay greater attention to bad news.
They use this negativity bias to explain the greater reaction to bad news (than good
news) in the Australian and US markets. Consistent with the notion of a negativity bias,
if investors pay greater attention to bad news, then there is likely to be negative drift (for
bad news) irrespective of the levels of uncertainty and sentiment. Put simply, investors
place a greater weight on the negative signal than the prevailing market conditions. On the
other hand, investors tend to greet good news with an optimistic bias (Eil and Rao 2011).
We propose that this optimistic bias is at its greatest when good news arrives in periods of
high investor sentiment and low levels of uncertainty. At such times, the combination of a
low level of uncertainty and a high sentiment boosts investor condence. So there is likely
to be a very positive reaction to good news in periods of high sentiment and low uncer-
tainty. However if the market sentiment is low, investors are likely to have a smaller
reaction to good news because the signal is inconsistent with their priors (i.e. of a poorly
performing stock market).
4.5 Announcement uncertainty/sentiment versus PEAD uncertainty/sentiment
The analysis to date has already provided us with some valuable insights into the
importance of market uncertainty and sentiment in explaining the PEAD. We now rene
our analysis in order to provide a clearer picture as to whether it is the level of uncertainty
and sentiment at the time of the announcement, or the levels prevailing over the post-
announcement period, that have the greatest impact on the PEAD.
In order to undertake this analysis we divided our sample up into two sub-samples:
1. The rst subsample contains those announcements made when market uncertainty is
high (above the median VIX level) and market sentiment is low (where S&P 500
returns are negative leading up to the announcement). These are the conditions where
one might expect the greatest market response to bad news and the least market
response to good news. Hence they are the conditions where one might expect the
The post-earnings announcement drift
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R. Bird et al.
1 3
lowest PEAD associated with bad news and the greatest PEAD associated with good
news.
2. The second subsample contains those announcements made when market uncertainty
is low (below the median) and market sentiment is high (where the S&P500 returns are
positive leading up to the announcement). These are the conditions where one might
expect the greatest market response to good news and the least market response to bad
news. Hence they are the conditions where one might expect the lowest PEAD
associated with good news and the greatest PEAD associated with bad news.
The next step is to analyse the PEAD of each of these subsamples in terms of how it is
impacted by the prevailing market uncertainty and sentiment over the post-announcement
period. This is done by regression Eq. 4 to our two sub-samples. The results of our analysis
are displayed in Table 6. The most striking aspect of the results is that it is the prevailing
conditions (of sentiment and uncertainty) during the post-announcement period that is
critical in driving the PEAD. For both subsamples (high VIX/low sentiment and low VIX/
high sentiment at the time of the announcement), we observe that high sentiment during the
post-announcement period signicantly reduces the negative drift after bad news but
increases positive PEAD following good news. For example, for good news released in the
least favourable investment climate of high uncertainty (i.e. VIX) and low sentiment, there
is a very strong positive drift when there is strong sentiment in the market during the PEAD
period, but when sentiment is weak there is either negative drift or no drift. It is worthwhile
noting that times of low sentiment are the conditions where Livnat and Petrovitis (2009)
suggest that there will be the greatest PEAD following good news. As for uncertainty, we
can see that irrespective of the level of uncertainty and sentiment at the time of the
announcement, when uncertainty is rising during the post-announcement period there is
always greater negative drift following bad news and lesser positive drift following good
news.
Having previously established that each of the prevailing uncertainty and prevailing
sentiment has an impact on the PEAD, we now turn our attention to considering their com-
bined impact. What we do in each case is compare the impacts on the PEAD of depressed
times (:DVIX ? LowSent) and favourable times (;DVIX ? HiSent) over the post-
announcement period. These impacts are indicated by the coefcients in bold in Table 6. In
all cases, there is a signicant impact on the PEADafter both good and bad news irrespective
of the levels of uncertainty and sentiment at the time of the announcement. These ndings
conrm the importance of the levels of market uncertainty and sentiment during the post-
announcement period in determining the price behaviour of stocks during this period.
The other important question to address is the relative importance of the uncertainty and
sentiment at the time of the announcement as compared to uncertainty and sentiment over
the post-announcement period, in terms of their impact on the PEAD. If we compare the
coefcient associated with bad news in Panel A (depressed environment) and in Panel B
(favourable environment), we see little difference between them. In other words, in
determining the PEAD the effect of the conditions existing at the time of the announce-
ment are insignicant compared to effect of the prevailing conditions over the post-
announcement period. The situation in relation to the PEAD after good news is not as clear
cut. Irrespective of the conditions at the time of the announcement there is a larger positive
PEAD when sentiment is high during the post-announcement period and a larger negative
PEAD when sentiment is low. In other words the level of market sentiment at the time of
the announcement does have some impact on the PEAD but this impact is swamped by the
level of sentiment prevailing over the post-announcement period.
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1 3
Previous studies such as Francis et al. (2007) and Livnat and Petrovitis (2009) have
emphasised that it is the level of uncertainty and/or sentiment prior to, or at the time of, the
announcement that determine the PEAD. Our analysis has shown that in the case of bad
news, the conditions at the time of the announcement make little or no contribution to
explaining variations in the PEAD and provide only a minimal contribution in the case of
good news. Rather, it is the uncertainty and sentiment prevailing during the post-
announcement period that plays a much more important role in explaining the PEAD. In
the case of bad news it is the prevailing post-announcement uncertainty that plays the
major role while in the case of good news it is clear that the greatest role is played by the
post-announcement prevailing sentiment.
4.6 Stock characteristics
The evidence provided to date conrms that the level of prevailing market uncertainty and
market sentiment over the post-announcement period play a critical role in explaining the
PEADphenomenon. The issue pursued in this sub-section is whether our ndings are sensitive
to certain characteristics of the rm making the announcement. The two characteristics eval-
uated are the rms market capitalisation and its book-to-market ratio as both have been found
to have a major inuence on a rms market returns (Fama and French 1992).
4.6.1 Small cap and large cap
We divided our sample into small cap stocks (dened as rm less than the sample median
market capitalisation) and large cap stocks (dened as stocks greater than the median market
capitalisation) and thenappliedEq. 4 toeachsub-sample. InTable 7, we repeat the information
provided in Table 6 but this time for small cap and large cap stocks respectively. The main
result is that the nding that prevailing market uncertainty and sentiment impact on the PEAD
holds for both small and large cap stocks. In all cases the PEADis much stronger after bad news
when uncertainty is high and sentiment is low and much stronger after good news when
uncertainty is lowand sentiment is high. It does appear that the level of market uncertainty and
sentiment at the time of the announcement, particularly when uncertainty is high and sentiment
low, does cause some differences in post-announcement price behaviour of small and large cap
stocks. However the previous nding remains robust: the main driver of PEAD is the post-
announcement uncertainty and sentiment. The other major nding is that in almost all cases the
PEAD for small cap rms is more impacted by the post-announcements levels of market
uncertainty and sentiment than is the case for large cap stocks. For example, the negative drift
after a bad news announcement is higher for smaller rms when conditions are depressed (i.e.
high uncertainty and low sentiment) and lower when conditions are favourable (i.e. low
uncertainty and high sentiment).
4.6.2 Value and growth rms
In Table 8, we present a summary of our ndings where we repeat the analysis reported in
Table 6, this time dividing the stocks into growth and values stocks as indicated by each
stocks book-to-market ratio. The PEAD of growth stocks follows the typical pattern when
the greatest post-announcement reaction to bad news occurs during periods of high
uncertainty and low sentiment while the greatest reaction to good news occurs during
periods of low uncertainty and high sentiment. While this nding also applies to bad news
The post-earnings announcement drift
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1 3
T
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The post-earnings announcement drift
1 3
announcements of value companies, their reaction to good news is surprisingly greatest
over periods when uncertainty is high and sentiment is low. The uncertainty and sentiment
levels at the time of the announcement do have an impact on the PEAD for both value and
growth stocks but this relationship is quite complicated. For example, if the initial con-
ditions are favourable (i.e. uncertainty is low and sentiment is high) rather than depressed,
then downward drift following bad news for value stocks is greater but only when senti-
ment is high over the post-announcement period. However, if the initial conditions are
depressed then there is a greater upward drift for value stocks in the post-announcement
period after a good news announcement but only during periods when uncertainty is high.
Our overall assessment is that although the conditions at the time of the announcement do
play a role in explaining the PEAD, it is the prevailing uncertainty and sentiment that exist
during this period that play the greater role.
As with large and small cap stocks, there is a clear difference between the PEAD
behaviour of growth stocks and value stocks, with the variation of the drift for growth
stocks over the post-announcement period being much larger than that for value stocks. For
example in the case of growth stocks there is a much greater upward drift during the post-
announcement period after good news when contemporaneous conditions are favourable
(i.e. low uncertainty and high sentiment) and a much greater downward drift when con-
ditions are depressed (i.e. high uncertainty and low sentiment). The bigger reaction to bad
news made by growth rms may be driven by the fact that the valuation of growth stocks is
very much dependent on the maintenance of investor condence which is likely to be
eroded when a disappointing earnings report is combined with a period of high market
uncertainty and low market condence (Skinner and Sloan 2002). Conversely, the com-
bination of a favourable earnings report and a positive market environment may fuel
euphoria that explains the larger reaction associated with good news announcements for
growth stocks. Thus we conclude that although the prevailing uncertainty and sentiment
during the post-announcement period has a signicant impact on the PEAD of both the
value and growth stocks, the inuence is much greater for the growth stocks.
5 Concluding remarks
Our ndings provide support for the suggestion that the state of mind of investors (i.e.
market sentiment) in concert with the clarity with which they interpret the information (i.e.
the level of market uncertainty) work together to determine how investors respond to an
earnings signal in the weeks immediately after that signal is made public. At one extreme,
we have a situation of high market uncertainty and low market sentiment which means
investors have difculty in interpreting the implications of the earnings announcement for
the value of the rm at a time when a negative tone overlays all of their investing. It is not
surprising that at such times there is a negative post-announcement drift associated with the
release of both bad and good news with the drift being considerably larger for bad news. At
the other extreme, we have a situation of low market uncertainty and high market senti-
ment prevailing during the post-announcement period which is a period where there is
greater clarity as to the implications of any new information coinciding with a time when
investors are somewhat euphoric with respect to their investing. Again, it is not surprising
that at such times investors respond to new information in a much more positive way,
resulting in an upward drift after the release of good news and a signicantly lower
downward drift after bad news.
R. Bird et al.
1 3
Previous writers have also found that uncertainty and sentiment play a role in deter-
mining the PEAD but they have stressed the importance of the levels of uncertainty and
sentiment at the time of announcement. Although we nd that the levels of uncertainty and
sentiment at the time of the information release perform a role in explaining the PEAD, it is
a much smaller role than that played by the uncertainty and sentiment that prevail over the
post-announcement period. Further, we demonstrate that our ndings hold for stocks with
different characteristics: small and large cap stocks, and value and growth stocks. How-
ever, our results show that the prevailing sentiment and uncertainty over the post-
announcement period has the greatest inuence on the PEAD experienced by growth
stocks as compared to value stocks, and small cap stocks as compared to large cap stocks.
This reects that the markets attitude to both growth stocks and small cap stocks is much
more ckle and heavily inuenced by the general tenor of the market as reected by the
prevailing levels of uncertainty and sentiment.
One other aspect of our ndings worthy of further comment is the role that uncertainty
plays in explaining why the market is more responsive to bad news than it is to good news.
Consistent with the literature, we nd that asymmetric responses by the market to bad news
and good news increase with the level of uncertainty. However as noted previously sen-
timent can be effective in offsetting this asymmetric response and may even at times
reverse it.
In this paper we have validated the importance of the role of the post-announcement
market uncertainty and market sentiment in explaining the existence of a PEAD. It also
opens up the opportunity for various lines of future research. One possible line of future
research would be to integrate market uncertainty and sentiment with other proposed
explanations for the PEAD in an attempt to provide a more complete explanation for this
long standing market anomaly. A second line of research would focus on investigating
strategies for exploiting the PEAD. Previous research has suggested a protable strategy
would be to invest in stocks that make good news announcements at a time when market
conditions are depressed (i.e. high uncertainty and low condence). The presumption here
is that there will be an initial underreaction to the good news giving rise to the possibility
of beneting from the subsequent price correction. What our research has shown is that the
success of such a strategy will very much depend on the uncertainty and sentiment pre-
vailing over the period that a stock is held. Undoubtedly, the premise upon which this
investment strategy is based is sound but our research has shown that the holding period
required to exploit this opportunity is itself unpredictable. The third area of research is to
further pursue the role that uncertainty and sentiment play in asset pricing. The fact that
they impact on how the market reacts to information suggest that they both may well play a
role in asset pricing. In future research, it may be productive to test the inclusion of
uncertainty and sentiment as factors in an asset pricing context.
Acknowledgments The authors would like to thank the Paul Woolley Centre at the University of
Technology Sydney and the School of Management at the University of Waikato for providing the funding
for this research project. The authors would also like to thank the contributions of the comments/suggestions
of an anonymous referee which greatly improved the paper.
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