Earnings announcements and the Stockholm Stock Exchange: Irrational investors and market inefficiency

Abstract

Earlier research has demonstrated the existence of the anomaly post earnings announcement drift (PEAD) on several efficient markets; i.e. the phenomenon where an unexpectedly good (bad) earnings report causes a firms share price to outperform (underperform) the market for an extended time period after the report. Using event study methodology and an extended sample of 10,252 quarterly earnings reports from 297 small, medium and large-cap stocks listed on the Stockholm Stock Exchange during the time period 2005 through 2015, I confirm the existence of PEAD. I present a simple trading strategy that in theory would have generated 11.1 percent in annual abnormal returns. Using a more practical and perspicuous method, I confirm the findings of Setterberg (2007). My findings support the view that liquidity and risk factors are not the sole cause of PEAD and I argue for a behavioral explanation.