The post-earnings-announcement drift is a longstanding anomaly that conflicts with market efficiency. This study documents that the post-earnings-announcement drift occurs mainly in highly illiquid stocks. A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a monthly value-weighted return of 0.04 percent in the most liquid stocks and 2.43 percent in the most illiquid stocks. The illiquid stocks have high trading costs and high market impact costs. By using a multitude of estimates, the study finds that transaction costs account for 70–100 percent of the paper profits from a long–short strategy designed to exploit the earnings momentum anomaly.

Author Information

Tarun Chordia is the R. Howard Dobbs Chair in Finance at Goizueta Business School, Emory University, Atlanta.

Amit Goyal is associate professor of finance at Goizueta Business School, Emory University, Atlanta.

Gil Sadka is assistant professor of accounting at Columbia Business School, Columbia University, New York City.

Ronnie Sadka is associate professor of finance at Carroll School of Management, Boston College.

Lakshmanan Shivakumar is the London Business School Chaired Professor of Accounting at London Business School.

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