Financial Education

Academic studies have frequently confirmed that the effects on stock price from an earnings surprise continue well after the actual earnings announcement. This “drift” suggests that investors show a delayed reaction to the news of an earnings surprise and helps explain the momentum effect.

In the July/August 2007 Financial Analysts Journal, Lerman, Livnat and Mendenhall examine whether the method of measuring earnings surprise is important. Most prior studies have estimated earnings using historical time-series data rather than analyst estimates. The authors find that the drift effect is larger if analyst estimates are used, and that using both analyst forecasts and time-series data produces the best results in terms of forecasting future stock price.

For more information, see all articles on: Behavioral Finance, Investing in Stocks, Investment Returns, Portfolio Management, Valuation

See also:

Standardized Unexpected Earnings (SUE)

Scaled Earnings Surprise

Are Markets Semistrong Form Efficient?

Adjusted Earnings Yield

Risk and Return in Fixed Income Arbitrage