2010 Volume 3 Pages 1-17
Post-earnings announcement drift (PEAD) is a well-known anomaly discussed in U.S. academic literature. However, there are a limited number of studies on PEAD in the context of the Japanese stock market. Therefore, this paper examines whether PEAD can be detected in the Japanese stock market and whether or not the expectations of investors and analysts for future accounting numbers are rational. I found that although PEAD exists in the Japanese stock market, it cannot be explained by the capital asset pricing model (CAPM) or the Fama-French 3-factor model. In addition, the Mishkin test revealed that investors tend to underreact to accounting information and that they correct this underreaction gradually. These findings are consistent with the hypothesis that investors and analysts are influenced by a behavioral bias, called “anchoring and adjustment,” in the process of forming expectations about future corporate profits and that PEAD is associated with this behavioral bias.
