Behaviour of Asset Pricing Anomalies Around Earnings Announcements: An international Perspective

Abstract

In support of the efficient market hypothesis, Fama (1998) suggests financial anomalies are nothing but "methodological illusions". Existing literature tests certain anomalies around Earnings Announcements (EAs) and finds that anomalous returns are enhanced around these dates, indicating mispricing. However, due to data limitations, not much work has been done beyond US samples. Extending the existing country specific literature on anomalies, this study tests value/growth and price momentum anomalies around earnings announcements for a sample of 46 non-US countries over a period of ten years (1999-2008). Using robust event study methodology, the study contributes to the literature by providing evidence on anomalies around earnings announcements in an international perspective. The study also contributes by providing a cross-country perspective which allows a test of the impact of certain rules (e.g. various accounting standards) and regulations (e.g. various investor protection regulations) on the size of anomalies and could also help explain the differences (if any) across countries. Because countries with better accounting standards and hence better earnings announcement informativeness have higher value/growth portfolio returns around earnings announcements, the tests on value/growth support the mispricing argument. The case of price momentum is also in conformity with initial results; accounting standards stand out in cross-sectional regressions as well as rule of law and political stability. None of these results can be explained by the risk based argument.