The Effects of Investor Relations on Post-Earnings Announcement Drift

The purpose of this paper is to examine the relationship between investor relations (hereafter, IR) and post-earnings announcement drift (hereafter, PEAD ), one of the most extraordinary phenomena in the capital market. PEAD may differ depending on the content of disclosure related to IR. The sample period examined in this study extends from 2001 to 2008. Differences were investigated between firms engaging in IR activity and those not engaging in IR activity in terms of PEAD. The results revealed that PEAD was greater for firms engaging in IR activity. In a second analysis, we limited the sample to those firms engaging in IR activity, and investigated the effects of disclosure versus non-disclosure. The results indicated that firms disclosing operating performance information through IR activity experienced less PEAD than those not doing so. While engaging in IR activity increases the amount of information available to potential investors, this information may simply confuse investors and exacerbate PEAD. However, if the information is related to management performance and accounting numbers are presented, understanding of the firm’s accounting earnings will increase and eventually, information asymmetry among investors will decrease, thus mitigating PEAD after the earnings announcement. In our empirical analysis of the effects of IR involvement, we classify the content of disclosure and examine the mitigating effects of voluntary disclosure on PEAD. The significance of voluntary disclosure is emphasized, and supporting evidence is provided for the findings of previous papers, which stated that PEAD is caused by market participants’ lack of understanding of accounting information.