Currency fluctuations and the post-earnings announcement drift

Zhaochu Li and Iryna P. Lytvynenko

Finance Research Letters, 2021, vol. 40, issue C

Abstract: This study examines whether currency fluctuations can partially explain the post-earnings announcement drift (PEAD). First, after sorting firms based on standardized unexpected earnings (SUE), we document that firms in high (low) SUE-sorted portfolios respond more (less) favorably to contemporaneous currency fluctuations than the market average. Second, prior studies have found that investors underreact to the impact of currency fluctuations on firm earnings. This underreaction and the differential responsiveness to currency fluctuations across SUE-sorted deciles together offer an explanation why firms in high (low) SUE-sorted deciles continue to have higher (lower) returns than the market average in subsequent months. Empirically, we show that currency fluctuations can predict future earnings surprises and abnormal returns of the PEAD portfolios, which take a long position on firms in the highest SUE-sorted deciles and a short position on firms in the lowest SUE-sorted deciles. These findings provide evidence that currency fluctuations can partially explain PEAD.

Keywords: Post-earnings announcement drift; Currency fluctuations; Earnings surprises; Abnormal returns (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:40:y:2021:i:c:s154461231931058x

DOI: 10.1016/j.frl.2020.101742

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