The Earnings Announcement Return Cycle

42 Pages Posted: 8 Jun 2018  

Juhani T. Linnainmaa

USC Marshall School of Business; National Bureau of Economic Research (NBER)

Conson Zhang

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: May 22, 2018

Abstract

Stocks earn negative abnormal returns before earnings announcements and positive after them. An "earnings announcement return cycle" (EARC) strategy earns a four-factor alpha of 8.5% per year (t-value = 6.12). The EARC is unrelated to the earnings announcement premium, and it is a feature of stocks widely covered by analysts. Analysts' forecasts follow the same pattern as returns: analysts’ forecasts become more optimistic after an earnings announcement and more pessimistic as the next one draws near. We attribute one-half of the earnings announcement return cycle to this “optimism cycle.” The EARC may stem from mispricing. Both the average return and optimism patterns are stronger among high-uncertainty and difficult-to-arbitrage stocks, and the EARC strategy is more profitable on days when it would accommodate larger amounts of arbitrage capital.

Suggested Citation

Linnainmaa, Juhani T. and Zhang, Yingguang, The Earnings Announcement Return Cycle (May 22, 2018). Available at SSRN: https://ssrn.com/abstract=3183318 or http://dx.doi.org/10.2139/ssrn.3183318

Juhani T. Linnainmaa (Contact Author)

USC Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yingguang Zhang

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

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