'Consistent' Earnings Surprises

52 Pages Posted: 15 Mar 2010 Last revised: 9 Sep 2014

See all articles by Byoung-Hyoun Hwang

Byoung-Hyoun Hwang

Nanyang Business School, Nanyang Technological University

Baixiao Liu

Peking University HSBC Business School

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2014

Abstract

We hypothesize that analysts with a bullish stock recommendation have an interest in not being subsequently contradicted by negative firm-specific news. As a result, these analysts report downward-biased earnings forecasts so that the company is less likely to experience a negative earnings surprise. Analogously, analysts with a bearish recommendation report upward biased earnings forecasts so that the firm is less likely to experience a strong positive earnings surprise. Consistent with this notion, we find that stock recommendations significantly and positively predict subsequent earnings surprises, as well as narrow beats versus narrow misses. Stock recommendations also predict earnings-announcement-day returns. A long-short portfolio that exploits this predictability earns abnormal returns of 125 basis points per month.

Keywords: Stock recommendations, Biased earnings forecasts, Career concerns

JEL Classification: G14, G18, G20

Suggested Citation

Hwang, Byoung-Hyoun and Liu, Baixiao and Lou, Dong, 'Consistent' Earnings Surprises (August 2014). Available at SSRN: https://ssrn.com/abstract=1571619 or http://dx.doi.org/10.2139/ssrn.1571619

Byoung-Hyoun Hwang (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Baixiao Liu

Peking University HSBC Business School ( email )

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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

Paper statistics

Downloads
665
Abstract Views
4,576
rank
38,804
PlumX Metrics