The Materiality of Earnings Surprise

Abstract

This study uses First Call Corp. earnings surprise data and market-adjusted stock returns for the seven-day period surrounding each of about 22,000 annual earnings announcements from 1992-1997 to address several questions recently posed by SEC officials. We find that mean and median stock returns of portfolios ranked on earnings surprise magnitudes typically have the same sign as the surprise, but have the opposite signs for about 45% of observations comprising each portfolio. We also find that for a given absolute surprise magnitude, absolute price response is inversely related to the dispersion of analysts' forecasts.

JEL Classification: G14, M41