35 Pages Posted: 13 Mar 2011
Date Written: March 10, 2011
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: 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