Is trading on earnings surprises a profitable strategy? Canadian evidence
This study examines the profitability of trading on earnings surprises in the post-earnings announcement period for Canadian equities spanning the period 1994–2009. There is clear evidence that stock prices drift in the direction of earnings surprise for several months following an earnings announcement. Specifically, we find that standardized unexpected earnings based on analyst forecasts (SUEAF), our main definition of earnings surprise, indicates that a hedge strategy of going long on firms in the highest SUEAF decile and going short on firms in the lowest SUEAF decile generates a greater than 6% excess return in the 60 days following the earnings announcement. We also show that that while both the SUEAF and standardized unexpected earnings (SUE) capture earnings surprise, each contains information that is not entirely subsumed by the other. In summary, we advance that the post-earnings announcement drift is caused by the market's delay in responding to earnings information. Our findings have major investment implications, since investors in general and Canadian investors in particular can exploit this anomaly.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 21 (2011)
Issue (Month): 5 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/intfin|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fama, Eugene F., 1998.
"Market efficiency, long-term returns, and behavioral finance,"
Journal of Financial Economics,
Elsevier, vol. 49(3), pages 283-306, September.
- Eugene F Fama, "undated". "Market Efficiency, Long-Term Returns, and Behavioral Finance," CRSP working papers 448, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Eugene F. Fama, "undated". "Market Efficiency, Long-term Returns, and Behavioral Finance," CRSP working papers 340, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Garman, Mark B. & Ohlson, James A., 1981. "Valuation of risky assets in arbitrage-free economies with transactions costs," Journal of Financial Economics, Elsevier, vol. 9(3), pages 271-280, September.
- Mark B. Garman and James A. Ohlson., 1980. "Valuation of Risky Assets in Arbitrage-Free Economies with Transactions Costs," Research Program in Finance Working Papers 103, University of California at Berkeley.
- Bernard, Victor L. & Thomas, Jacob K., 1990. "Evidence that stock prices do not fully reflect the implications of current earnings for future earnings," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 305-340, December.
- Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
- Weimin Liu & Norman Strong & Xinzhong Xu, 2003. "Post-earnings-announcement Drift in the UK," European Financial Management, European Financial Management Association, vol. 9(1), pages 89-116.
- Schwert, G. William, 2003. "Anomalies and market efficiency," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 15, pages 939-974 Elsevier.
- G. William Schwert, 2002. "Anomalies and Market Efficiency," NBER Working Papers 9277, National Bureau of Economic Research, Inc.
- Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
- Jeffrey Wurgler & Ekaterina Zhuravskaya, 2000. "Does Arbitrage Flatten Demand Curves for Stocks?," Yale School of Management Working Papers ysm152, Yale School of Management, revised 01 Nov 2001.
- Ke, Bin & Ramalingegowda, Santhosh, 2005. "Do institutional investors exploit the post-earnings announcement drift?," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 25-53, February.
- Tarun Chordia & Lakshmanan Shivakumar, 2005. "Inflation Illusion and Post-Earnings-Announcement Drift," Journal of Accounting Research, Wiley Blackwell, vol. 43(4), pages 521-556, 09.
- Ahn, Hee-Joon & Cao, Charles Q. & Choe, Hyuk, 1998. "Decimalization and competition among stock markets: Evidence from the Toronto Stock Exchange cross-listed securities," Journal of Financial Markets, Elsevier, vol. 1(1), pages 51-87, April.
- Joshua Livnat & Richard R. Mendenhall, 2006. "Comparing the Post-Earnings Announcement Drift for Surprises Calculated from Analyst and Time Series Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 44(1), pages 177-205, 03.
- Abarbanell, Jeffrey S & Bernard, Victor L, 1992. " Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior," Journal of Finance, American Finance Association, vol. 47(3), pages 1181-1207, July.
- Richard R. Mendenhall, 2004. "Arbitrage Risk and Post-Earnings-Announcement Drift," The Journal of Business, University of Chicago Press, vol. 77(4), pages 875-894, October.
- Brown, Lawrence D. & Hagerman, Robert L. & Griffin, Paul A. & Zmijewski, Mark E., 1987. "Security analyst superiority relative to univariate time-series models in forecasting quarterly earnings," Journal of Accounting and Economics, Elsevier, vol. 9(1), pages 61-87, April.
- Philip Shane & Peter Brous, 2001. "Investor and (Value Line) Analyst Underreaction to Information about Future Earnings: The Corrective Role of Non-Earnings-Surprise Information," Journal of Accounting Research, Wiley Blackwell, vol. 39(2), pages 387-404, 09.
- Latane, Henry A & Joy, O Maurice & Jones, Charles P, 1970. "Quarterly Data, Sort-Rank Routines, and Security Evaluation," The Journal of Business, University of Chicago Press, vol. 43(4), pages 427-438, October.
- Jeffrey Pontiff, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1135-1151.
- Richardson, Scott & Tuna, Irem & Wysocki, Peter, 2010. "Accounting anomalies and fundamental analysis: A review of recent research advances," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 410-454, December.
- Latane, Henry A & Jones, Charles P, 1979. "Standardized Unexpected Earnings--1971-77," Journal of Finance, American Finance Association, vol. 34(3), pages 717-724, June.
- Jeffrey T. Doyle & Russell J. Lundholm & Mark T. Soliman, 2006. "The Extreme Future Stock Returns Following I/B/E/S Earnings Surprises," Journal of Accounting Research, Wiley Blackwell, vol. 44(5), pages 849-887, December.
- Richard R. Mendenhall, 2002. "How Naïve Is the Market's Use of "Firm-Specific" Earnings Information?," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 841-863, 06.
- Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
- Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
- Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
- Collins, Daniel W. & Hribar, Paul, 2000. "Earnings-based and accrual-based market anomalies: one effect or two?," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 101-123, February. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:21:y:2011:i:5:p:832-850. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.