Post-Earnings Announcement Drift in Spain and Behavioural Finance Models

Our study examines whether behavioural theories can explain post-earnings announcement drift (i.e. earnings momentum) in the Spanish market. In particular, we test models proposed by Barberis et al. (Journal of Financial Economics, 49, pp. 307-343, 1998), Daniel et al. (Journal of Finance, 53(6), pp. 1839-1885, 1998) and Hong and Stein (Journal of Finance, 54(6), pp. 2143-2184, 1999). Each of these behavioural models draws on two premises - cognitive biases and limits to arbitrage - that we assume will vary with a given country's cultural and institutional features. Therefore, we must exercise caution when extrapolating the favourable results observed in the US market to markets outside of the USA. Our results provide little evidence in support of the hypothesis used to test whether these models can indeed explain the earnings momentum anomaly in the Spanish market. We believe some characteristics of the Spanish market, such as its lower score on the Individualism Index, lower levels of investor protection and code-law-based legal system, may explain why our results differ from those obtained in the USA.