Trading frictions and the Post-earnings-announcement drift

We use laboratory experiments to analyze how the existence of trading frictions (a transaction fee and bans on short selling and margin buying) affects the occurrence and strength of the post-earnings-announcement drift. We find less trading activity and higher asset prices in the presence of frictions. While the initial price reaction to earnings announcements is weaker, the strength of the PEAD is not materially affected. Trading strategies aimed at exploiting the PEAD are less profitable in the presence of frictions. • We study the effect of frictions on the Post-Earnings Announcement Drift (PEAD). • The frictions we study are transaction fees and bans on short selling and margin buying. • In the presence of frictions, trading activity is reduced and asset prices are higher. • In the presence of frictions, the initial price reaction to earnings announcements is weaker. • In the presence of frictions, trading strategies to exploit the PEAD are less profitable.