(4) Stober (1992) replicates their analysis and shows that the estimated abnormal
returns continue at an almost constant rate for at least six years beyond
the earnings prediction date. This suggests the financial statement variables
used by Ou and Penman are proxying for expected returns3’
(5) Stober’s result, that the abnormal returns extend for at least six years after
the earnings prediction is made, is qualitatively inconsistent with Ou and
Penman’s own hypotheses and model. Their research design predicts only
one-year-ahead earnings. It specifically identifies and trades on information
about next year’s earnings that is contained in this year’s financial statements
[see Ou and Penman (1989a, p. 298), for example]. It does not address
six-years-ahead earnings. But not one of the studies on post-announcement
drift, surveyed in section 4.1 above, has price responses to earnings lagging
by more than three quarters. 31 The continuation of the estimated abnormal
returns for at least four and one quarter years beyond the horizon predicted
by the Ou and Penman hypothesis is grossly inconsistent with that hypothesis.
It implies that the hypothesis has failed to describe the empirical
phenomenon that is observed.