Journal of Applied Finance & Banking

Post-earnings-announcement drift anomaly: The role of operating and non-operating income in the Taiwanese stock market

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  • Abstract 

    This paper examines the relationship between unexpected earnings components (i.e., unexpected operating and non-operating income) and post-earnings- announcement drift to determine whether both components contribute to the mispricing phenomenon. I find that both operating and non-operating income surprises explain the marketís underweighting of earnings surprises. However, the contribution of operating income surprises is significantly higher than non-operating income surprises. While the mispricing of components appears to be captured by post-earnings-announcement drift, the speed of price responses to unexpected non-operating income is faster than for unexpected operating income. Moreover, unexpected operating and non-operating income mispricing are distinct mispricing phenomena, and a joint hedge portfolio trading strategy generates excess abnormal returns when based only on an unexpected operating or non-operating strategy. 

    JEL classification numbers: G14, M41
    Keywords: Post-earnings-announcement drift, Operating income, Non-operating income.