Presidential cycles in PEAD

Speaker: Prof. Ming Zeng

Venue: Room 530, Chengjun No.7 Building, Zijingang Campus

Abstract: Post-earnings announcement drift (PEAD) displays presidential cycles: it earns 4.1% per year during Democratic presidencies but its profitability increases significantly to 14.9% during Republican presidencies. Survey-based evidence also indicates substantial underreaction to earnings news when the US president is Republican. The tax component of firm earnings exhibits significantly higher volatility during Republican periods, likely reflecting higher tax policy uncertainty. Consistently, we find that the PEAD is much stronger for firms with larger exposure to tax policy changes during Republican presidencies. This explanation accounts for the observed presidential cycles in PEAD, whereas existing explanations for PEAD cannot. The cycles are more pronounced among non-microcap firms.