Can ESP Yield Abnormal Returns?
Lawrence D. Brown
Journalof Portfolio Management, Vol. 23, No. 4, 1997
Foreknowledge of earnings surprises is more valuable than trading on known earnings surprises. Earnings surprises are predictable to a considerable extent. I evaluate the performance of an earnings surprise predictor (ESP), which foretells how close analyst expectations of quarterly earnings numbers will be to upcoming earnings numbers. I examine performance over nine years, adjust returns for those of the S&P 500 index, and I adopt an implementable trading strategy. I show that ESP outperforms the S&P 500 index in all nine years. I also show that a weighted portfolio assigning higher weights to stocks expected to have the largest positive earnings surprises has a higher return and a lower variance than a portfolio that assigns equal weights to all rank groups.
Number of Pages in PDF File: 8Accepted Paper Series
Date posted: May 8, 2008
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