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Dissertation Information for Craig D. Nichols

NAME:
- Craig D. Nichols

DEGREE:
- Ph.D.

DISCIPLINE:
- Business Administration

SCHOOL:
- Indiana University (USA) (2005)

ADVISORS:
- James M. Wahlen

COMMITTEE MEMBERS:
- M. Daniel Beneish
- Robert F. Dittmar
- Gerald L. Salamon

MPACT Status: Incomplete - Not_Inspected

Title: A partial explanation for post-earnings-announcement drift: Autocorrelation risk in earnings

Abstract: In this paper, I examine autocorrelation risk in earnings as a partial explanation for post-earnings-announcement drift. Autocorrelation risk refers to temporal variation in the autocorrelation structure of seasonally-differenced earnings (SDE) that is common (i.e., systematic) across firms. Rational investors should impound earnings information into price as if they adjust autocorrelation coefficients to certainty equivalents to reflect any systematic temporal variation in SDE autocorrelation. I demonstrate that the use of certainty-equivalent-adjusted autocorrelation coefficients could produce drift in future size- or market-adjusted returns related to current SDE and the appearance of biased autocorrelation coefficients impounded into price. This is important because it provides one possible explanation for the results in papers such as Ball and Bartov [1996]. I provide evidence that SDE autocorrelation is systematic in that it varies with future economic growth and contains temporal variation that is shared across sample firms. In addition, SDE autocorrelation coefficients vary with a proxy for investors' intertemporal marginal rate of substitution for consumption. Consistent with the autocorrelation risk model's predictions, I find that an element of risk in equity returns depends on the sign and magnitude of current SDE, the very partitioning variable used in prior literature to document drift. Overall, the evidence suggests that systematic temporal variation in SDE autocorrelation leads to risk differences across portfolios formed on the basis of extreme SIDE. In this paper, I estimate that 20% to 25% of the average returns associated with the SDE strategy arise from risk.

MPACT Scores for Craig D. Nichols

A = 0
C = 0
A+C = 0
T = 0
G = 0
W = 0
TD = 0
TA = 0
calculated 2010-09-22 19:20:33

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