Accounting Papers

Document Type

Journal Article

Date of this Version

5-2010

Publication Source

Journal of Accounting and Economics

Volume

50

Issue

1

Start Page

20

Last Page

41

DOI

10.1016/j.jacceco.2009.12.002

Abstract

We document a market failure to fully respond to loss/profit quarterly announcements. The annualized post portfolio formation return spread between two portfolios formed on extreme losses and extreme profits is approximately 21 percent. This loss/profit anomaly is incremental to previously documented accounting-related anomalies, and is robust to alternative risk adjustments, distress risk, firm size, short sales constraints, transaction costs, and sample periods. In an effort to explain this finding, we show that this mispricing is related to differences between conditional and unconditional probabilities of losses/profits, as if stock prices do not fully reflect conditional probabilities in a timely fashion.

Copyright/Permission Statement

© 2010. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

loss/profit mispricing, loss/profit predictability, accounting losses/profits, post-earnings-announcement drift, earnings-based anomalies

Included in

Accounting Commons

Share

COinS
 

Date Posted: 27 November 2017

This document has been peer reviewed.