Earnings Announcement Premia and the Limits to Arbitrage

We reexamine the existence of earnings announcement-day premia and find that they persist beyond the sample period of earlier studies, over different disclosure environments and remain robust to the refinement of using the expected announcement day rather than the actual announcement day. We provide evidence that the premia are reduced in the presence of earnings pre-announcements. We document that a portfolio of announcing firms yields returns in excess of the corresponding risk. Excluding announcers from a well-diversified portfolio, while reducing the standard deviation of that portfolio, also reduces its Sharpe ratio, indicating that this strategy results in a less favorable risk-return trade-off. Finally, we find that the limits to arbitrage are a likely explanation for the persistence of the announcement premia.