Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns
University of Southern California - Marshall School of Business - Finance and Business Economics Department
Samuel M. Hartzmark
University of Chicago - Booth School of Business
David H. Solomon
University of Southern California - Marshall School of Business
Eugene F. Soltes
Harvard Business School
April 6, 2015
We present evidence consistent with markets failing to properly price information in seasonal earnings patterns. Firms with historically larger earnings in one quarter of the year (“positive seasonality quarters”) have higher returns when those earnings are usually announced. Analysts have more positive forecast errors in positive seasonality quarters, consistent with the returns being driven by mistaken earnings estimates. We show that investors appear to overweight recent lower earnings following positive seasonality quarters, leading to pessimistic forecasts in the subsequent positive seasonality quarter. The returns are not explained by a number of risk-based explanations, firm-specific information, increased volume, or idiosyncratic volatility.
Number of Pages in PDF File: 61
Keywords: Earnings, Seasonality, Mispricing, Analysts, Anomalies
JEL Classification: G12, G14
Date posted: June 29, 2014 ; Last revised: April 9, 2015
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