Post Earnings Announcement Trading Strategy: A Study on the Swedish Stock Market during January 2001-July 2006

Abstract: A puzzling stock market anomaly is the post earnings announcement drift (PEAD), where stock prices continue to drift in the direction of the earnings surprise after the earnings is publicly known. This thesis examines the PEAD in Sweden during January 2001 to July 2006 and investigates whether it is possible to build a successful trading strategy based on this anomaly. We used the standardized unexpected earnings (SUE) metric to form portfolios and calculate the abnormal returns subsequent to an earnings announcement. We found that a long position in stocks with unexpected earnings in the highest quintile combined with a short position in stocks in the lowest quintile yield a significant annual abnormal return of 18.65% for a 60 day holding period.