Is Trading on Earnings Surprises a Profitable Strategy? Canadian Evidence

35 Pages Posted: 13 Mar 2011  

Mark Chudek

Monash University

Cameron Truong

Monash University; Financial Research Network (FIRN)

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area

Date Written: March 10, 2011

Abstract

This study examines the profitability of trading on earnings surprises in the post-earnings announcement period for Canadian equities spanning the period 1994-2009. There is clear evidence that stock prices drift in the direction of earnings surprise for several months following an earnings announcement. Specifically, we find that standardized unexpected earnings based on analyst forecasts (SUEAF), our main definition of earnings surprise, indicates that a hedge strategy of going long on firms in the highest SUEAF decile and going short on firms in the lowest SUEAF decile generates a greater than 6% excess return in the 60 days following the earnings announcement. We also show that that while both the SUEAF and standardized unexpected earnings capture earnings surprise, each contains information that is not entirely subsumed by the other. In summary, we advance that the post-earnings announcement drift is caused by the market’s delay in responding to earnings information. Our findings have major investment implications, since investors in general and Canadian investors in particular can exploit this anomaly.

Keywords: post-earnings announcement drift, earnings surprise, revenue surprise, arbitrage risk

JEL Classification: G11, G14, G15, M41

Suggested Citation

Chudek, Mark and Truong, Cameron and Veeraraghavan, Madhu, Is Trading on Earnings Surprises a Profitable Strategy? Canadian Evidence (March 10, 2011). Available at SSRN: https://ssrn.com/abstract=1783049 or http://dx.doi.org/10.2139/ssrn.1783049

Mark Chudek

Monash University ( email )

Clayton
Victoria
Australia

Cameron Truong

Monash University ( email )

Wellington Road
Victoria, Roodepoort 3145
Australia

Financial Research Network (FIRN)

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

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

Madhu Veeraraghavan (Contact Author)

T.A. PAI Management Institute, Finance Area ( email )

Bangalore
Manipal, Karnataka 576104
India
+91-820-2701030 (Phone)

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