Stocks that beat consensus on earnings keep drifting upward for weeks to months; those that miss drift down. The textbook case of market underreaction. The surprise metric, concrete entry rules, and how crowding erodes the edge, from a practitioner's angle.
Post-Earnings-Announcement Drift (PEAD) is not a bet on the earnings report itself.
A stock that beats consensus with a positive surprise tends to drift upward for weeks to months after the announcement, while one that misses with a negative surprise drifts downward. You are harvesting that persistence.
What you are betting on is not whether the next quarter will be good or bad.
It is the tendency for price to keep moving in the surprise's direction even after the report is public.
That a stock jumps the instant good numbers print is obvious.
What PEAD harvests is not that instant jump but the smouldering remainder, the part that keeps grinding in the same direction after the pop.
The market does not fully price new information in one shot. So after the surprise, the unpriced remainder gets absorbed slowly.
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The phenomenon was first laid out systematically by Bernard and Thomas in their 1989 and 1990 work.
Ranking stocks by the size of their earnings surprise, they repeatedly observed that the return gap between strong-surprise and weak-surprise groups keeps widening in one direction for a while after the announcement.
Under a naive reading of the efficient-market hypothesis, new information should be priced instantly.
PEAD instead shows that this pricing happens not instantly but gradually over weeks to months, making it the most famous empirical case of underreaction.
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