Earnings Surprise and Sophisticated Investor Preferences in India

Journal of Contemporary Accounting and Economics, Forthcoming

Posted: 21 Dec 2008

See all articles by Kaustav Sen

Kaustav Sen

Pace University - Lubin School of Business

Date Written: December 20, 2008

Abstract

In this paper, I examine the existence of earnings surprise anomaly for a sample of actively traded stocks in the Bombay Stock Exchange during 2001-2006. I also examine if sophisticated institutional investors, in particular transient investors, exploit the earnings surprise anomaly. My results indicate that using a standard time series model to forecast earnings, there is clear evidence of a post earnings announcement drift in the Indian market, even after controlling for common factors that affect risk and transaction costs. However, I find very little evidence that indicates transient investors exploit the earnings surprise mispricing. Attribution analysis of hedge portfolio returns based on increases in ownership by transient investors indicates that earnings surprise does not play a role; risk and liquidity does. A direct test of what causes increase in ownership by transient investors provides little support for the role of earnings surprise. Robustness tests also indicate that while earnings surprise is mispriced by the market, the level of transient investor ownership does not mitigate this effect.

Keywords: India, earnings surprise, momentum

JEL Classification: M41, M47, G12, G14

Suggested Citation

Sen, Kaustav, Earnings Surprise and Sophisticated Investor Preferences in India (December 20, 2008). Journal of Contemporary Accounting and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1318705

Kaustav Sen (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212 618 6413 (Phone)
212 618 6410 (Fax)

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