Streaks in Earnings Surprises and the Cross-section of Stock Returns
Management Science, Forthcoming
34 Pages Posted: 16 Feb 2009 Last revised: 14 Nov 2013
Date Written: October 27, 2011
The gambler's fallacy (Rabin, 2002) predicts that trends bias investor expectations. Consistent with this prediction, we find that investors underreact to streaks of consecutive earnings surprises with the same sign. When the most recent earnings surprise extends a streak, post-earnings announcement drift is strong and significant. In contrast, the drift is negligible following the termination of a streak. Indeed, streaks explain about half of the post-earnings announcement drift in our sample. Our results are robust to more general definitions of trends than streaks and a battery of control variables including the magnitude of earnings surprises and their autocorrelation. Overall, post-earnings announcement drift has a significant time-series component that is consistent with the gambler's fallacy.
Keywords: Trends, Streaks, Gambler's Fallacy, Post-Earnings Announcement Drift
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation