The Earnings Announcement Premium and Trading Volume

Topics - Equities

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The Earnings Announcement Premium and Trading Volume

NBER Working Paper

On average, stock prices rise around scheduled earnings announcement dates. We show that this earnings announcement premium is large, robust and strongly related to the surge in volume around announcement dates.

Stocks with high past announcement-period volume earn the highest announcement premium, suggesting some common underlying cause for both volume and the premium. We show that high-premium stocks experience the highest levels of imputed small-investor buying, suggesting that the premium is driven by buying by small investors when the announcement catches their attention.

In this paper, we provide evidence on the magnitude and robustness of the earnings announcement premium. We find monthly strategies earning excess returns of between 7% and 18% per year, with Sharpe ratios larger than other popular anomalies. The premium is strong in large capitalization stocks, is not only confined to the three-day window around the announcement, and appears consistently since 1927.

We also provide an explanation for the premium. We find that stocks with high volume around earnings announcements have subsequently both high premiums and high imputed buying by individual investors. This finding suggests that for some stocks, prices are pushed higher around announcement dates by buying pressure from individuals.

We show that the strategy of buying every stock expected to announce over the subsequent month and shorting every stock not expected to announce yields a return of over 60 basis points per month. We show that announcement premium is quantitatively substantial, especially among large-cap securities, and lasts about 20 days.

This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. Diversification does not eliminate the risk of experiencing investment losses. 

This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.

The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.