16 Pages Posted: 22 Apr 2009
Date Written: April 22, 2009
We study the profitability of a strategy based on the earnings surprises. First, we attempt to identify variables, in addition to earnings surprise, that will improve our ability to predict post-earnings announcement returns. Second, we test a strategy based on the SUE effect using a stock-market simulation that considers transactions costs, short-sales constraints, and cash management issues, e.g., is cash available when a buy transaction is called for by the strategy? Discussions with practitioners indicate that assumption behind our simulation are fairly realistic. Our results, unfortunately, are inconclusive. While the SUE strategy earned significantly higher returns over the 1988 through 1992 time period than a buy-and-hold strategy, the superior performance was confined almost entirely to a two-year sub-period. That we can devise a simple strategy, however, with a turnover in excess of 300% per year that can perform as well as the value-weighted index over three years of the study and outperform it by a very wide margin for two years, suggests that money mangers might formulate more sophisticated strategies that can do even better.
Keywords: Market efficiency, Anomalies, Earnings, SUE, PEAD, Post-earnings announcement drift
JEL Classification: G14, M44
Suggested Citation: Suggested Citation