The post-earnings-announcement drift is a longstanding anomaly that conflicts
with market efficiency. This study documents that the post-earnings-announcement
drift occurs mainly in highly illiquid stocks. A trading strategy that goes long
high-earnings-surprise stocks and short low-earnings-surprise stocks provides a
monthly value-weighted return of 0.04 percent in the most liquid stocks and 2.43
percent in the most illiquid stocks. The illiquid stocks have high trading costs
and high market impact costs. By using a multitude of estimates, the study finds
that transaction costs account for 70–100 percent of the paper profits
from a long–short strategy designed to exploit the earnings momentum
anomaly.