Sequential Verification Theory: A Rational Framework for Momentum and Post-Earnings Announcement Drift

We present a unified rational framework for two of the most persistent anomalies in empirical finance: cross-sectional momentum and Post-Earnings Announcement Drift (PEAD). Part I introduces the theory of Kinetic Buffer Verification (KBV), which models momentum as the equilibrium price path generated bya Sequential Probability Ratio Test (Wald, 1947). The market sequentially testswhether a firm’s outperformance reflects a structural competitive buffer or transient cyclical luck. Momentum is the observable price adjustment caused by theprogressive rejection of the mean-reversion hypothesis. A Capital Efficiency Pivotresolves the standard objection that declining risk should reduce returns: verified security frees precautionary capital for offensive redeployment, simultaneously raisingexpected cash flows as the discount rate falls. Part II derives Rational Information Decay (RID) as the discrete, concentrated special case of KBV appliedto the earnings season. PEAD is the compressed verification cycle in which earlyreporters resolve sector-level ambiguity, passive index flows transmit partial pricingto unreported peers, and residual firm-specific drift reflects the time-cost of distinguishing structural moats from cyclical variance. An endogenous reporting-orderequilibrium rationalizes the empirical near-uniformity of PEAD magnitude acrossthe reporting calendar. The full framework employs Student-t copula dependence,discrete-event summation, and a supply-chain spillover matrix. Fourteen falsifiablepredictions are derived across both anomalies, several of which are observationallydistinct from behavioral alternatives.