Analysis of the post-earnings announcement drift anomaly on the JSE

Abstract

The post-earnings announcement drift anomaly has been widely researched and confirmed for several markets around the world. This paper investigates the relationship between the earnings surprise as reflected by the price change immediately after the earnings announcement and the subsequent price drift over the next 120 days, called the PEAD effect. Evidence obtained for JSE listed shares over the period from 1991 to 2010 indicates that the PEAD effect is present, that its magnitude is statistically significant and that it exists independently of the size, value and momentum effects. The results indicate that after the initial reaction to the announcement, it is not until about the 20th to 40th trading day after the announcement that the share price starts drifting in the same direction as the initial reaction. Contrary to previous research that confirmed the overreaction phenomenon on the JSE for the period 1975-1989 (Bhana, 1995), the market therefore seems not to over- or under-react to the earnings information, but to receive confirmation in the two months following the announcement that is in line with the announcement – in the case of a positive surprise this confirmation may be indicative of better future prospects and that the higher than expected earnings might persist.