IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Is trading on earnings surprises a profitable strategy? Canadian evidence

  • Chudek, Mark
  • Truong, Cameron
  • Veeraraghavan, Madhu
Registered author(s):

    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.

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443111000394
    Download Restriction: Full text for ScienceDirect subscribers only

    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.

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 21 (2011)
    Issue (Month): 5 ()
    Pages: 832-850

    as
    in new window

    Handle: RePEc:eee:intfin:v:21:y:2011:i:5:p:832-850
    DOI: 10.1016/j.intfin.2011.06.004
    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.:

    as in new window
    1. Jeffrey Pontiff, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1135-1151.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    8. 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.
    9. Latane, Henry A & Jones, Charles P, 1979. "Standardized Unexpected Earnings--1971-77," Journal of Finance, American Finance Association, vol. 34(3), pages 717-24, June.
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. 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.
    15. G. William Schwert, 2002. "Anomalies and Market Efficiency," NBER Working Papers 9277, National Bureau of Economic Research, Inc.
    16. 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.
    17. 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 1181-207, July.
    18. 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 427-38, October.
    19. 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.
    20. 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.
    21. 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.
    22. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    23. 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.
    24. 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 607-36, May-June.
    25. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    26. 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.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top 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: (Shamier, Wendy)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.