China's Stock Market Earnings Announcement Price Drift Study

In recent years, traditional finance faced more and more questions and challenges in issuers about efficient market, but the research and interpretation to these question by behavioral finance based on investor's psychology and limited arbitrage actually receives more and more mainstream economist's affirmation. Behavioral finance from market imperfect angle embarking, analyzes the effective market "anomalies" as its theoretical research framework. In this framework, the study of financial anomalies is an important part.The earnings announcement influence is widespread, since long, Earnings announcements provide information about the earnings of the announcing firms themselves, displayed the classic post earnings announcement drift (PEAD) effect. Even if there are few literature investigate relationship between announcing firms and their peer firms in the same industry, but this research only limits in the industry. there lack systematic analysis of earnings information impact to related firms in other industries, as well as in this information transmission process, the market response condition——is rational or irrational.According to the calculated correlation implied returns and constructed investment portfolio, this paper studies on the response of stock price of nonannounceing firms in the same industry and related firms in other industries to the quarterly earnings information from announced firms. The paper found that there exist earning information transfer in the intra-and inter-industry, which means that this information real reflection other related company's fundamental quality.In view of earnings information transfer within intra-and inter-industry, the paper finds that market appears to underreact to the earning news, based on the momentum effect and drift effects on post-announcement of earning in the control. It is proved that the underreaction is long-existed but never confirmed market "anomalies", which is called "pre-earnings announcement drift" effect. Furthermore, according to decompose the correlation implied returns, the paper find that the "anomalies" results from covariance term of implied returns. Also, the paper shows that transaction costs in transmission of earning information based on amihuid illiquidity measure may help to explain the anomaly.From the research technique, the usual literature on earning announcement effect need to calculate the unexpected earnings relied earnings forecast data or historical earnings data followed by analysts. However, these financial data are often incomplete or difficult to obtain. But, our research overcome this shortcoming through the design related implied returns strategy, which allows us to use a much larger sample and a much longer time period. The result causes the research to be more precise.