Conservatism and Cross-Sectional Variation in the Post-Earnings-Announcement-Drift

45 Pages Posted: 23 Apr 2003

Date Written: March 2003


Accounting conservatism allows me to identify a previously undocumented source of predictable cross-sectional variation in Standardized Unexpected Earnings' autocorrelations viz. the sign of the most recent earnings realization and present evidence that the market ignores this variation ("loss effect"). It is possible to earn returns higher than from the Bernard and Thomas (1990) strategy by incorporating this feature. Additionally, the paper shows that the "loss effect" is different from the "cross quarter" effect shown by Rangan and Sloan (1998) and it is possible to combine the two effects to earn returns higher than either strategy alone. Thus, the paper corroborates the Bernard and Thomas finding that stock prices fail to reflect the extent to which quarterly earnings series differ from a seasonal random walk and extends it by showing that the market systematically underestimates time-series properties resulting from accounting conservatism.

Keywords: Anomalies, Time Series Forecasts, Conservatism, Post-earnings-announcement-drift, Market Efficiency

JEL Classification: G14, M41, M44

Suggested Citation

Narayanamoorthy, Ganapathi S., Conservatism and Cross-Sectional Variation in the Post-Earnings-Announcement-Drift (March 2003). Available at SSRN:

Ganapathi S. Narayanamoorthy (Contact Author)

Tulane University - Accounting & Taxation ( email )

United States

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