Firm complexity and post-earnings announcement drift

Alexander Barinov, Shawn Saeyeul Park and Celim Yildizhan
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Alexander Barinov: University of California Riverside
Shawn Saeyeul Park: Yonsei University

Review of Accounting Studies, 2024, vol. 29, issue 1, No 16, 527-579

Abstract: Abstract We show that the post-earnings announcement drift (PEAD) is stronger for conglomerates than single-segment firms. Conglomerates, on average, are larger than single segment firms, so it is unlikely that limits-to-arbitrage drive the difference in PEAD. Rather, we hypothesize that market participants find it more costly and difficult to understand firm-specific earnings information regarding conglomerates, as they have more complicated business models than single-segment firms. This in turn slows information processing about them. In support of our hypothesis, we find that, compared to single-segment firms with similar firm characteristics, conglomerates have relatively low institutional ownership and short interest, are covered by fewer analysts, and these analysts have less industry expertise and make larger forecast errors. Finally, we find that an increase in organizational complexity leads to larger PEAD and document that more complicated conglomerates have even greater PEAD. Our results are robust to an extensive list of alternative explanations of PEAD as well as alternative measures of firm complexity.

Keywords: Organizational complexity; Post-earnings-announcement drift; Conglomerates; Complicated firms; Firm complexity and post-earnings-announcement drift (search for similar items in EconPapers)
JEL-codes: D82 G11 G12 G14 G32 L14 M41 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Firm Complexity and Post-Earnings-Announcement Drift (2018)
Working Paper: Firm Complexity and Post-Earnings-Announcement Drift (2018)
Working Paper: Firm Complexity and Post-Earnings-Announcement Drift (2014)
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DOI: 10.1007/s11142-022-09727-8

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