The Extreme Future Stock Returns Following Extreme Earnings Surprises

41 Pages Posted: 8 Dec 2003

See all articles by Jeffrey T. Doyle

Jeffrey T. Doyle

Utah State University

Russell J. Lundholm

University of British Columbia - Sauder School of Business

Mark T. Soliman

University of Southern California - Marshall School of Business

Date Written: December 2004

Abstract

We investigate the stock returns subsequent to large quarterly earnings surprises, where the benchmark for an earnings surprise is the consensus analyst forecast. By defining the surprise relative to an analyst forecast rather than a time-series model of expected earnings, we document returns subsequent to earnings announcements that are much larger, persist for much longer, and are more heavily concentrated in the long portion of the hedge portfolio than shown in previous studies. We show that our results hold after controlling for risk and previously documented anomalies, and are positive for every quarter between 1988 and 2000. Finally, we explore the financial results and information environment of firms with extreme earnings surprises and find that they tend to be "neglected" stocks with relatively high book to market ratios, low analyst coverage, and high analyst forecast dispersion. In the three subsequent years, firms with extreme positive earnings surprises tend to have persistent earnings surprises in the same direction, strong growth in cash flows and earnings, and large increases in analyst coverage, relative to firms with extreme negative earnings surprises.

Keywords: Earnings Surprise, Abnormal Returns, Market Inefficiency

JEL Classification: M41, G12, G29

Suggested Citation

Doyle, Jeffrey T. and Lundholm, Russell J. and Soliman, Mark T., The Extreme Future Stock Returns Following Extreme Earnings Surprises (December 2004). Ross School of Business Paper No. 922. Available at SSRN: https://ssrn.com/abstract=476741

Jeffrey T. Doyle

Utah State University ( email )

College of Business
Logan, UT 84322-3540
United States

Russell J. Lundholm (Contact Author)

University of British Columbia - Sauder School of Business ( email )

2053 Main Hall
Vancouver, British Columbia V6T 1Z2
Canada

Mark T. Soliman

University of Southern California - Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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