Institutional Investors' Behavior And Post-earnings Announcement Drift

"Post-Earnings-Announcement Drift (PEAD)" refers to the special phenomenon that the stock price react to the earnings announcement message after company's earnings announcement, that is, after the earnings announcement, stock prices continued to drift upward when unexpected earnings is positive; stock prices continued to drift downward when unexpected earnings is negative. Since Ball and Brown (1968) first discovered this anomaly, followed by a large number of empirical studies confirm:Whether the control of other risk factors, or to change the measure of the surplus, this anomaly is still there. Efficient Market Hypothesis (EMH) suggests that if the market price deviations, which will attract arbitrageurs entered for carrying out arbitrage transactions, thereby eliminating market pricing errors. So, after the earnings announcement stock price resulting from sustained pricing discrepancies, rational investors will adjust the investment portfolio, and make a profit, the continuing arbitrage transactions will eventually eliminate this bias. Fama (1998) in an article pointed out that the persistence of PEAD anomaly is a strong challenge to the "efficient market".This article from the perspective of institutional investors to examine the behavior of institutional investors in the PEAD anomaly.In this paper, standardized unexpected earnings (SUE) computed from the sample stock's annual report and semi-annual data is used as a measure of the surplus of information, and use the number of holdings released by all funds in their semi-annual and annual reports to calculate the proportion of institutional investor's position.According to test results, this paper found that:1) whether or not consider institutional investors, the Shanghai stock market has emerged as a more significant PEAD characteristics:before the company release earnings announcement, stock prices had been under the direction of change in SUE. Notable among them are:for SUE1 (i.e. bad news group), before the announcement the stock price has been on a downward trend, but from the date of announcement, the stock has given rise to a certain degree of recovery. This may be due to the unique "shell resources" of China's stock market. Also because the market mechanism is imperfect, the speculation on the message is still one of the popular trend, the abnormal price increases of corporation with bad news may reflect the market's speculation for the reorganization; fund groups involved in SUE 10 continue to rise after the earnings announcement and the extent is far greater than the stock in SUE 10 group which lack of participation of funds. After the announcement behavior of institutional investors has led to the price of stock with good news further upward drift.2) As the majority of the tests were not significant, there is no clear evidence that institutional investors'positions change is a prediction about the company's SUE.3) Institutional investors are aware of the abnormal stock price after the earnings announcement drift, and adjust the corresponding stock holdings in order to obtain excess returns. At the same time institutional investors'arbitrage is limited by arbitrage constraints.4) Institutional investors, but also affects the arbitrage PEAD.patterns, for high-SUE group (good news) performance is particularly evident, after the earnings announcement, the agency's actions have caused a more substantial upward price drift.5) Under the restrictions on short selling in the Chinese market, in most time periods, study time window is 30 days, the institutional investors can take advantage of PEAD anomaly and obtain a significant excess returns. Time window extended to 60 days, 90 days, the result is no longer significant. Moreover, from the view of the time point, in the second half of 2005 and the first half of 2008 the results were not significant, just the two time periods are relatively sluggish of overall performance of the market. The results mean that whether institutional investors can use PEAD arbitrage profits depend on the market's overall trend.