Robust Measures of Earnings Surprises
52 Pages Posted: 29 Jul 2014 Last revised: 6 May 2018
Date Written: May 3, 2016
Event studies of market efficiency measure an earnings surprise with the consensus error (CE), defined as earnings minus the average of professional forecasts. If a subset of forecasts can be biased, the ideal but difficult to estimate parameter-dependent alternative to CE is a nonlinear filter of individual errors that adjusts for bias. We show that CE is a poor parameter-free approximation for this ideal measure. The fraction of misses on the same side FOM, by discarding the magnitude of misses, offers a far better approximation. FOM performs particularly well against CE in predicting the returns of US stocks, where bias is potentially large, than that of international stocks.
Keywords: Event Studies, Efficient Markets, Earnings Announcements, Post-Earnings Announcement Drift
JEL Classification: G1, G12
Suggested Citation: Suggested Citation