Accounting Earnings Volatility And Post-Earnings Announcement Drift

As an important indicator of the quality of accounting information, earnings volatility is an important manifestation of the company’s risk. So it is necessary to research the performance of the company and the return of capital market from the perspective of earnings volatility. Studies have found that earnings volatility will reduce the accuracy of earnings forecasts and high earnings volatility leads to poor earnings persistence. Due to the impact of earnings volatility on earnings persistence, investors can’t predict earnings accurately and completely. To the surprise between the expected earnings and actual earnings, whether the market is able to reflect timely or lack of reflection has become a problem worthy of research. Based on this idea, this paper has empirically tested earnings volatility effect of listed companies in Shanghai and Shenzhen stock market by using quarterly earnings data between 2003 and 2012 and applying packet inspection and regression analysis.Grouping according to earnings volatility and using Foster Model, we find that SUE autocorrelation coefficient decreases from 1.198 to 0.277 with quarterly earnings volatility from Ql (low) to Q5 (high), which means the greater the volatility of quarterly earnings, the smaller the autocorrelation coefficient of standard unexpected earnings, and the worse the persistence of quarterly earnings. In order to facilitate comparison with previous studies, we also use interactive variable in model regression to test the effect of earnings volatility on earnings persistence, and come to same conclusion:earnings volatility is negatively related to autocorrelation coefficient of SUE in an significant way.For the market reaction to the earnings volatility effect, we calculate market-adjusted cumulative abnormal returns respectively in both a three-day (short) window around the subsequent earnings announcement and a one-quarter (long) window from the current earnings announcement to the next. We find that firms with higher earnings volatility have lower PEAD abnormal returns and there is a significant negative relationship between earnings volatility and PEAD abnormal returns in both short window and long window. In the PEAD context, we conclude that the market ignores the volatility effect and the higher the earnings volatility, the lower the PEAD abnormal returns. PEAD is not only a function of the magnitude of an earnings surprise but also a function of its persistence.We also examine the relationship between earnings volatility and market friction. Previous studies have shown that the extent of mispricing has a positive association with the market friction, that is, PEAD abnormal returns is typically concentrated in firms with the largest trading frictions. We find that the relation between earnings volatility and market friction is positive, which means lower earnings volatility firms have lower trading frictions. Taken together, these findings imply that firms with smaller market friction have lower earnings volatility, leading to higher PEAD abnormal return, which is in contrast to the findings in prior most anomaly studies. This shows that the PEAD abnormal returns have include the company’s market risk, but ignore the financial risk, which may lead to the possibility of arbitrage based on financial risks.