Review of Quantitative Finance and Accounting

, Volume 43, Issue 3, pp 605–625 | Cite as

The profitability, costs and systematic risk of the post-earnings-announcement-drift trading strategy

Original Research


This paper re-examines the profitability of the post-earnings-announcement-drift (PEAD) trading strategy using a practical simulation approach that aligns with a fund manager’s investment perspective. It allows us to calculate the break-even transaction costs of following a PEAD strategy, and permits the explicit incorporation of transaction costs. Using US data from 1974 to 2007, we show that the traditional event-study method understates the risk and overstates the abnormal return of the PEAD strategy. Accounting for transaction costs in a practical simulation framework, we show there is no abnormal return (alpha) from the PEAD strategy in multi-factor asset pricing regression analyses. These results are robust to sub-period analyses and alternative transaction cost measures. The effects of intraday timing and information risk on the PEAD strategy are also explored. Overall, our study shows that the practical aspects of implementing the PEAD strategy are vitally important to evaluating the risk and return of the strategy. We provide a practical, analytical tool that can be directly adopted by fund managers to study the PEAD strategy with their institutional parameters of transaction costs and market timing.


Post earnings announcement drift Trading strategy Efficient market hypothesis Simulation approach Transaction costs 

JEL Classification

G11 G12 G14 



We thank the two anonymous referees and the editor of the Journal, Professor Cheng-few Lee, for their helpful comments.


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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Department of Accounting and Finance, Leeds University Business SchoolUniversity of LeedsLeedsUK
  2. 2.Department of FinanceBradford University School of ManagementBradfordUK
  3. 3.International Institute of Banking and Financial Services (IIBFS), Leeds University Business SchoolUniversity of LeedsLeedsUK

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