Effects of Growth Options on the Post-Earnings Announcement Drift

Abstract

This paper shows that growth options, measured by the market-asset to book-asset ratio (MABA), have significant effects on the post-earnings announcement drift. First, the abnormal returns during the postearnings announcement period are significantly and negatively correlated to the growth options. This indicates that the traditional benchmark of abnormal returns might not have been able to capture the real underlying risks. Further, the negative relation between growth options and the drift is especially significant for firms with positive earnings surprises. Collectively, our findings suggest that there are asymmetry effects of growth options on the post-earnings announcement drift.