Post-Earnings-Announcement Drift in India
Post-earnings-announcement drift is a widely researched market anomaly that forms an argument against the semi-strong form of efficient market hypothesis. The presence of post-earnings-announcement drift (PEAD) or, earnings momentum in India was first documented by Chaturvedi in 2000 using data for stocks trading on the Mumbai Stock exchange (BSE). There has been a subsequent study (Roy and Shantakumar, 2013) attributing the drift to model misspecification errors. The current paper attempts to continue in the path of Chaturvedi to further document, confirm and analyze the presence of the drift in Indian capital markets. This paper attempts to determine whether the Indian market demonstrates inefficiency in responding to publicly available earnings information by exhibiting drift in the direction of the earnings surprise. Using a simple first-order auto-regressive model for forecasting earnings and the market model for estimating abnormal returns, I hypothesize as per standard event study methodology that abnormal returns are not significantly different from zero. On plotting the graphs of Abnormal Returns and Cumulative Abnormal Returns, one might be motivated to argue for the existence of a “drift” in the Indian capital market and it seems so from the data presented. However, I would argue strongly against the efficient market hypothesis upon investigating a much larger sample size over a greater period of time. But for the time being, my findings do point towards negative abnormal returns after negative earnings surprises.
Great Lakes Institute of Management, Chennai, India
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