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Recency Bias and Post-Earnings Announcement Drift

In this paper we examine the role of the timing of 52-week high, or recency, in the post earnings announcement drift (PEAD) puzzle. We argue that, because investors are less likely to bid up (down) a stock price if a stock’s 52-week high occurred in the recent (distant) past, these stocks are underpriced (overpriced) and earn higher (lower) future returns. We report these findings. First, PEAD profits are mainly driven by recency bias. An enhanced strategy based on both PEAD and recency accounts for 74% of total PEAD profits. Second, the recency bias accounts for the entire PEAD profits of large stocks and of the recent 24 years. The effect of recency bias on PEAD exists even after controlling for price proximity to 52-week high. Our evidence suggests that recency bias plays an important role in PEAD.