The Earnings Announcement Return Cycle

50 Pages Posted: 8 Jun 2018 Last revised: 4 Oct 2021

See all articles by Juhani T. Linnainmaa

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Yingguang (Conson) Zhang

Peking University - Department of Finance, Guanghua School of Management

Date Written: August 14, 2021

Abstract

Stocks earn negative abnormal returns before earnings announcements and positive after them. Analysts' forecasts, recommendations, and target prices follow the same pattern: analysts start optimistic after earnings announcements but grow pessimistic as the next ones draw near. Analysts' optimism appears to drive the high returns early in the cycle and firms' disclosures of bad news cause both the low returns and analysts' pessimism late in the cycle. The tug of war between analysts and firms significantly affects anomaly profits: strategies that trade for or against contrarian anomalies depending on where the firms are relative to announcing their earnings earn as large alphas as the original anomalies—despite being unconditionally anomaly neutral.

Suggested Citation

Linnainmaa, Juhani T. and Zhang, Yingguang, The Earnings Announcement Return Cycle (August 14, 2021). Available at SSRN: https://ssrn.com/abstract=3183318 or http://dx.doi.org/10.2139/ssrn.3183318

Juhani T. Linnainmaa (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yingguang Zhang

Peking University - Department of Finance, Guanghua School of Management ( email )

Beijing, Beijing 100871
China

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