Firm Complexity and Post-Earnings-Announcement Drift

Alexander Barinov, Shawn Saeyeul Park and Celim Yildizhan

MPRA Paper from University Library of Munich, Germany

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 size, conglomerates have relatively low institutional ownership and short interest, are covered by fewer analysts, these analysts have less industry expertise and also make larger forecast errors. Finally, we find that an increase in firm complexity leads to larger PEAD and document that more complicated conglomerates have greater PEADs. Our results are robust to a long list of alternative explanations of PEAD as well as alternative measures of firm complexity.

Keywords: innate business complexity; post-earnings-announcement drift; conglomerates; complicated firmscomplexity; Celim Yildizhan; Alexander Barinov; Shawn Saeyeul Park (search for similar items in EconPapers)
JEL-codes: D82 G11 G12 G14 M41 (search for similar items in EconPapers)
Date: 2016-04-28, Revised 2018-11-09
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https://mpra.ub.uni-muenchen.de/89919/1/MPRA_paper_89919.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/91418/4/MPRA_paper_91418.pdf revised version (application/pdf)

Related works:
Journal Article: Firm complexity and post-earnings announcement drift (2024)
Working Paper: Firm Complexity and Post-Earnings-Announcement Drift (2018)
Working Paper: Firm Complexity and Post-Earnings-Announcement Drift (2014)
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