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Korean J Financ Stud > Volume 47(4); 2018 > Article
Korean Journal of Financial Studies 2018;47(4):673-707.
DOI: https://doi.org/10.26845/KJFS.2018.08.47.4.673    Published online August 31, 2018.
Effects of Limits-to-Arbitrage on Post Earnings Announcement Drift
Byeung-Joo Lee, Dongcheol Kim, Kyung Jin Choi
차익거래 제한요인이 이익공시 후 주가지연현상에 미치는 영향
이병주, 김동철, 최경진
고려대학교
Abstract
This paper examines whether post-earnings-announcement drift (PEAD) in the Koeran Stock Market is a consequence of the risk premium for omitted latent risk factors or of systematic mispricing from investors’ delayed response to earnings news.
To examine whether PEAD is still prominent after adjustment for risk factors, we form portfolios (SUE1~SUE4) sorted on standardized unexpected earnings (SUE). We find that value-weighted average excess raw returns and cumulative abnormal returns tend to monotonically increase across SUE portfolios. Further, the difference in average excess return between highest and lowest SUE portoflios (i.e., SUE4?SUE1), which is the return of the SUE-based zero-investment strategy, is positive and statistically significant. We also find that riskadjusted abnormal returns, which are computed from the well-known three models (i.e., CAPM, Fama-French three-factor model, and Fama-French five-factor model), still show a monotonic increasing pattern across SUE portfolios. The difference in abnormal return between highest and lowest SUE portfolios is also positive and statistically significant. Therefore, these results indicate that it is difficult to argue that PEAD is a consequence of the risk premium for omitted risk factors in the Korean stock market.
We also examine the effect of limits-to-arbitrage on PEAD, and find that as the degree of limits-to-arbitrage is more profound, the degree of the drift is more prominent. That is, the difference, SUE4?SUE1, tends to increase in magnitude and statistical signiciance with the degree of limits-to-arbitrage. Furthermore, the difference in SUE4-SUE1 between the most and least severe limits-to-arbitrage portfolios (i.e., difference-in-difference) is positive and statistically significant. These results indicate that PEAD is more profound as limits-to-arbitrage becomes more severe.
In summary, this paper provides evidence supporting the arguments that PEAD in the Korean stock market may be a consequence of delayed response to unexpected earnings news due to limits-to-arbitrage, rather than a manifestation of the risk premium for omitted latent risk factors. To our knowledge, this paper is the first in the literature in Korea that comprehensively evaluates the two explanations for PEAD.
Key Words: 이익공시 후 주가지연현상(PEAD),차익거래 제한요인,자산가격결정모형,초과수익률,효율적 시장,Post-Earnings-Announcement Drift,Limits-To-Arbitrage,Asset Pricing Models,Risk-Adjusted Abnormal Returns,Market Efficiency


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