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Earnings Announcements are Full of Surprises

37 Pages Posted: 19 Jun 2006 Last revised: 25 Feb 2008

Runeet Kishore

Duke University - Fuqua School of Business

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Pedro Santa-Clara

New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Mohan Venkatachalam

Duke University - Fuqua School of Business

Date Written: January 22, 2008

Abstract

We study the drift in returns of portfolios formed on the basis of the stock price reaction around earnings announcements. The Earnings Announcement Return (EAR) captures the market reaction to unexpected information contained in the company's earnings release. Besides the actual earnings news, this includes unexpected information about sales, margins, investment, and other less tangible information communicated round the earnings announcement. A strategy that buys and sells companies sorted on EAR produces an average abnormal return of 7.55% per year, 1.3%more than a strategy based on the traditional measure of earnings surprise, SUE. The post earnings announcement drift for EAR strategy is stronger than post earnings announcement drift for SUE. More importantly, unlike SUE, the EAR strategy returns do not show a reversal after 3 quarters. The EAR and SUE strategies appear to be independent of each other. A strategy that exploits both pieces of information generates abnormal returns of about 12.5% on an annual basis.

Keywords: post-earnings announcement drift, market efficiency, under-reaction, non-earnings accounting information

JEL Classification: G12, G14

Suggested Citation

Kishore, Runeet and Brandt, Michael W. and Santa-Clara, Pedro and Venkatachalam, Mohan, Earnings Announcements are Full of Surprises (January 22, 2008). Available at SSRN: https://ssrn.com/abstract=909563 or http://dx.doi.org/10.2139/ssrn.909563

Runeet Kishore

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-2942 (Phone)

Michael W. Brandt

Duke University - Fuqua School of Business ( email )

1 Towerview Drive
Durham, NC 27708-0120
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pedro Santa-Clara (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Lisbon
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~psc/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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