Quick definition Post-announcement drift (PAD) is when prices continue moving in the direction of an announcement days after the initial reaction. Prices drift upward after good news or downward after bad news. What it is A company announces earnings 20 percent higher than expected. The stock jumps 5 percent immediately (announcement effect). Over the next two weeks, it drifts upward another 5 percent. This drift is PAD. PAD suggests markets underreact to announcements. The initial move is too small; prices take days to fully adjust. Why it matters PAD is a market inefficiency. If you know an announcement will drift, you can profit by trading in the direction of the drift. PAD is also evidence that markets are not perfectly efficient. Information is absorbed gradually, not instantly. Measurement PAD is measured by calculating abnormal returns (actual return minus expected) in the days and weeks after an announcement. Positive PAD means the drifting direction is profitable on average. Mechanisms for PAD Incomplete information diffusion: not everyone sees the announcement immediately Underreaction: investors don't fully update beliefs Gradual institutional buying/selling: institutions trade gradually Practical example Earnings announcement: profit rose 50 percent. Stock jumps 8 percent on the announcement. Market seems to have priced in a 30 percent profit increase. Over the next 10 days, the stock drifts upward another 10 percent as investors gradually revise upward. The total move (18 percent) reflects the full magnitude of the earnings surprise. Trading strategy Some traders exploit PAD by trading in the direction of the announcement and holding for 2-4 weeks. See also - Announcement Effect - Underreaction - Price Discovery - Earnings Drift
