Firms with lower profitability have lower expected returns because such firms perform better than expected when market volatility increases. The better-than-expected performance arises because unprofitable firms are distressed and volatile, their equity resembles a call option on the assets, and...

We show that the post earnings announcement drift (PEAD) is stronger for conglomerates thansingle-segment firms. Conglomerates, on average, are larger than single segment firms, so it isunlikely that limits-to-arbitrage drive the difference in PEAD. Rather, we hypothesize that marketparticipants...