Background
What is post-earnings announcement drift?
Post-earnings announcement drift, or PEAD, is the tendency for a stock to keep moving in the direction of its earnings surprise for weeks after the report. Beat expectations and the stock tends to keep drifting up; miss and it keeps sliding. It’s been documented since Ball & Brown in 1968 and is one of the most-studied patterns in finance.
Why it happens
The standard story is underreaction: the market doesn’t fully absorb an earnings surprise on the day, so the price keeps catching up over the following weeks. It persists because trading it is genuinely costly — you’d be trading hundreds of names around scattered earnings dates — so arbitrage doesn’t fully close the gap.
The catch
- It’s strongest in small, illiquid stocks, where trading costs eat much of the return.
- It has weakened as it became well known.
- The robust versions need analyst-estimate data to define the surprise — the raw price gap alone is a much weaker proxy.
How this relates to the earnings gap
PEAD is about the surprise. This site tests a cruder, more accessible question: does the price gap on earnings day — the thing anyone can see without estimate data — predict the next move for large-cap stocks? The answer is largely no, once you adjust for the market and account for costs.
See the test
The findings page walks through the full analysis — continuation vs reversal by horizon, sector, gap size, and market cap, with the market adjustment and cost check.
Read the findings →Common questions
What causes post-earnings drift?
The leading explanation is that investors underreact to earnings news — they don't fully price a surprise immediately, so the stock keeps adjusting over the following weeks. Slow information diffusion and limits to arbitrage (it's costly to trade hundreds of names around every earnings date) let the drift persist.
Does PEAD still work?
It's one of the more durable anomalies in the literature, but it has weakened as it became widely known, it's concentrated in small, illiquid stocks where trading costs are high, and the strongest versions require analyst-estimate data. A large-cap, cost-aware version is much milder.
Is the earnings gap the same as the earnings surprise?
No. The surprise is actual EPS versus the analyst consensus. The gap is just the overnight price move on the report. The gap partly reflects the surprise but also guidance, tone, and positioning — and on its own, for large caps, it doesn't carry tradeable forward information (see the headline test on this site).
Educational research, not advice.