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Opinion Divergence and the Post-Earnings Announcement Drift
Kirsten L Anderson, Georgetown University
Jeffrey H Harris, University of Delaware
Eric So, Nasdaq
ABSTRACT. We study how the level of opinion divergence among investors at the time of the earnings announcement affects the post-earnings announcement drift. We create a new measure of opinion divergence using a Herfindahl index of trade concentration and show that this measure, along with other opinion divergence measures used in prior literature, is related to the post-earnings announcement drift. When opinion divergence is greater at the time of the earnings announcement, post-earnings announcement drift is greater as well. We contend that the level of opinion divergence is a risk factor and therefore should be related to firm value. First, we show that our measure of opinion divergence is indeed related to the risk of the firm. Finally, we use a Fama-French framework to show that opinion divergence is related to firm value.
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