Arbitrage risk and post-earnings-announcement drift

This study examines whether the magnitude of post-earnings-announcement drift is related to the risk faced by arbitrageurs, who may view the anomaly as a trading opportunity. Consistent with this hypothesis, the magnitude of the drift is strongly related to the arbitrage risk measure developed by Wurgler and Zhuravskaya (2002). The effect of arbitrage risk is statistically and economically significant in a range of specifications. The results support the view of post-earnings-announcement drift as an underreaction to earnings information.