Orange is the New Black: Changing Landscapes of Earnings Surprises and the Market Reaction

43 Pages Posted: 26 May 2021 Last revised: 21 Jul 2021

See all articles by John C. Heater

John C. Heater

Duke University - Fuqua School of Business

Ye Liu

Fudan University

Qin Tan

City University of Hong Kong (CityUHK)

Frank Zhang

Yale School of Management

Date Written: July 14, 2021

Abstract

In this paper, we document strikingly opposite time-series patterns of earnings surprises and associated market reaction. Earnings surprises have been increasing over time, with the mean analyst forecast error rising from negative 8 cents in 1990 to positive 1.4 cents in 2019. However, average earnings announcement returns have declined from 0.30% in 1990 to -0.35% in 2019, turning negative in the past 15 years. As firms strive to meet or beat earnings expectations, strong past performance of a firm and strong performance of other firms raise the market’s earnings expectation above analysts’ consensus forecast, leading to investors’ disappointment upon earnings announcements. Our evidence has broad implications for appropriate earnings benchmarking, for empirical design when examining the earnings-return relation, for a disappearing earnings announcement premium, and for disappearing discontinuity in the earnings surprise distribution around zero.

Keywords: Analyst forecast, earnings surprises, earnings announcement returns, capital markets, discontinuity

JEL Classification: G30, G32, M21, M41

Suggested Citation

Heater, John C. and Liu, Ye and Tan, Qin and Zhang, Frank, Orange is the New Black: Changing Landscapes of Earnings Surprises and the Market Reaction (July 14, 2021). Available at SSRN: https://ssrn.com/abstract=3853030 or http://dx.doi.org/10.2139/ssrn.3853030

John C. Heater (Contact Author)

Duke University - Fuqua School of Business ( email )

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HOME PAGE: http://www.johnheater.com

Ye Liu

Fudan University ( email )

670 Guoshun Rd
Shanghai, Shanghai 200433
China

Qin Tan

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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