Post-Earnings-Announcement Drift Anomaly in India: A Test of Market Efficiency

Abstract

Anomalies are deviations from Efficient Market Hypothesis (EMH), one of the primary areas of research in the field of financial economics. The paper aims to examine the presence of one such deviation—the post-earnings-announcement-drift (PEAD) anomaly—in the Indian stock market over the period 2002 to 2017. Examining the PEAD anomaly appears to be an under-researched area for India, one of the fastest growing major economies of the world. Cross-sectional Fama and MacBeth [1] regression and paired t-test are the tools employed for the analysis. The results exhibit statistically significant PEAD and the findings are robust to sub-period analysis. The anomaly persists even after accounting for other variables—beta, market capitalization, price-to-book ratio (P/B ratio), illiquidity and idiosyncratic volatility. While regulators can employ the findings as input to meet their aim of achieving market efficiency, traders and investors can design their strategies to exploit the anomalous behavior.