Heterogeneous Beliefs And PEAD

Post-Earnings Announcement Drift (PEAD) is one of the most popular anomalies in stock markets all over the world. This phenomenon strongly challenges the efficient market hypothesis (EMH). We not only examine the existence of PEAD in the A-share market, but also study the relationship between investors' heterogeneous beliefs around announcement events and cumulative abnormal returns. Based on previous studies, we make relative unexpected turnover as a new alternative measure of opinion divergence. And we determine the event window period according to the change of investors'heterogeneous beliefs. Then we analyze all of the Chinese A-stock data from 2006 to 2008 by both statistical analysis and cross-sectional regression analysis. We find that the PEAD phenomenon exists in Chinese stock market. It will last for about 30 days. Negative returns follow positive surprises while positive returns follow negative surprises. In addition, opinion divergence at the earnings announcement negatively correlates with future returns. That means higher opinion divergence around earnings events is associated with more negative returns during the post-announcement period. It lasts for at least 90 days. We support Miller's (1977) opinion. He believe that the excepted returns will be lower when both divergence of opinions and short-sale constraint exist, because in this situation stock prices only reflect the opinions of optimists'and be overestimated. We draw a conclusion that our stock market still has a long way to go to be semi-strong form efficiency. We may find some opportunities to get abnormal returns. In the end, we make recommendations to the regulatory authorities, and propose two investing strategies to investors, including a optimal portfolio strategy and a arbitrage strategy based on stock index futures.