Abstract
This study investigates the existence of post-earnings announcement drift (PEAD) in the Japanese stock market in the 21st century. Drawing on rational inattention models, which suggest that investors’ limited processing capacities cause an underreaction to earnings announcements, this study determines whether the underreaction still exists in the modern Japanese stock market despite the development of technologies that assist investors in processing information. Furthermore, it examines whether the ownership structure, which reflects varying processing costs, affects the results. It reveals three key findings using a sample of 60,124 firm-year observations on the Japanese stock market from 2002 to 2020. First, PEAD decreases over the sample period. Second, it does not decrease in earnings announcements of firms with low foreign investor ownership or high individual investor ownership, indicating that underreaction persists when stocks are traded by investors who do not apply sophisticated technologies and continue to incur higher processing costs. Finally, this study attributes these changes in investors’ trading style to an increase in the price response to earnings announcements.
