This paper examines the relationship between unexpected
earnings components (i.e., unexpected operating and non-operating income) and
post-earnings- announcement drift to determine whether both components
contribute to the mispricing phenomenon. I find that both operating and
non-operating income surprises explain the marketís underweighting of earnings
surprises. However, the contribution of operating income surprises is
significantly higher than non-operating income surprises. While the mispricing
of components appears to be captured by post-earnings-announcement drift, the
speed of price responses to unexpected non-operating income is faster than for
unexpected operating income. Moreover, unexpected operating and non-operating
income mispricing are distinct mispricing phenomena, and a joint hedge
portfolio trading strategy generates excess abnormal returns when based only on
an unexpected operating or non-operating strategy.
Keywords: Post-earnings-announcement drift,
Operating income, Non-operating income.