Can ESP Yield Abnormal Returns?

8 Pages Posted: 8 May 2008

See all articles by Lawrence D. Brown

Lawrence D. Brown

Temple University - Department of Accounting

Date Written: 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.

Suggested Citation

Brown, Lawrence D., Can ESP Yield Abnormal Returns? (1997). Journalof Portfolio Management, Vol. 23, No. 4, 1997. Available at SSRN:

Lawrence D. Brown (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

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