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Earnings Surprise and Future Excess Returns

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
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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