Stock Market Efficiency with Respect to a New Measure of Earnings News

44 Pages Posted: 18 Aug 2009

See all articles by Cameron Truong

Cameron Truong

Monash University; Financial Research Network (FIRN)

Date Written: August 18, 2009

Abstract

This paper introduces a new proxy for expected value-relevant earnings: the most optimistic (pessimistic) forecast of earnings that is higher (lower) than the median of all analysts’ earnings forecasts over the 90 days prior to the earnings announcement when the median falls short of (exceeds) actual earnings. While our measure is ex post in the sense that it occurs after the distribution of forecasts over the 90 days prior to the earnings announcement is known, it is ex ante in the sense that investors could base a trading strategy on our new measure of earnings surprise computed immediately after an earnings announcement. We expect our ex post measure of earnings surprise to have a moderating effect on the traditional earnings news measure based on the consensus of analysts’ forecasts. For example, if the consensus is less than actual earnings and the most optimistic forecast is close to (much greater than) the consensus, then we expect the traditional analyst forecast error to contain more (less) information about future earnings, and we expect a larger (smaller) contemporaneous and delayed market reaction to earnings surprise based on the consensus forecast. Our results confirm these expectations. Furthermore, we find that our new measure of earnings surprise contains unique value-relevant information about future earnings, some of which generates a statistically significant immediate contemporaneous market response and some of which generates a statistically and economically significant amount of post-earnings announcement drift.

Suggested Citation

Truong, Cameron, Stock Market Efficiency with Respect to a New Measure of Earnings News (August 18, 2009). 22nd Australasian Finance and Banking Conference 2009, Available at SSRN: https://ssrn.com/abstract=1456814 or http://dx.doi.org/10.2139/ssrn.1456814

Cameron Truong (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
79
Abstract Views
865
rank
376,842
PlumX Metrics