Testing Market Efficiency in High Volatile Conditions: Evidence From Post-Earnings Announcement Drifts in U.S. Equities

Abstract

This thesis investigates the presence of post-earnings announcement drifts (PEAD) in a post-COVID context using daily return data on U.S. equities from 2020 to 2024. The anomaly known as post-earnings announcement drift refers to the tendency for stock prices to continue to drift in the direction of their initial market reaction following an earnings announcement. This form of short-term return predictability directly challenges the Efficient Market Hypothesis, which assumes that publicly available information is rapidly and fully reflected in market prices. The analysis is performed through an event study methodology, using initial earnings announcement returns (EAR) to proxy the magnitude of the earnings surprise. Firms are then sorted into decile portfolios based on their measured EAR, and the performance of each portfolio is then tracked over the following 59-day post event period. Cumulative average abnormal returns (CAARs) are used to assess whether any systematic drift occurs for the respective decile portfolios, after which the data sample is further segmented by firm size. The results show that PEAD remains statistically significant in small-cap firms with extreme positive earnings surprises, indicating that short-term return predictability persists in a small segment of the market. Furthermore, this thesis evaluates whether PEAD-based investment strategies in practice can yield risk-adjusted returns in excess of the market portfolio after real-world constraints are accounted for. While some proposed strategies deliver historical returns and Sharpe ratios above market benchmarks, these results do not hold statistical confidence once constraints such as transaction costs and timing issues are considered. While the findings suggest that PEAD persists as an inefficiency in small corners of the market it does not contradict the validity of the broader Efficient Market Hypothesis for the U.S. equities market. In a comparison with previous research on PEAD, it appears the exploitability of PEAD in modern capital markets is conditional on firm size, market volatility, and limited trading liquidity of assets.