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Earnings Surprises, Growth Expectations, and Stock Returns or Don't Let an Earnings Torpedo Sink Your Portfolio

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  • Douglas J. Skinner

  • Richard G. Sloan

Abstract

We provide new evidence that the inferior returns to growth stocks relative to value stocks are the result of expectational errors about future earnings performance. Our evidence demonstrates that growth stocks exhibit an asymmetric response to earnings surprises. We show that while growth stocks are at least as likely to announce negative earnings surprises as positive earnings surprises, they exhibit an asymmetrically large negative price response to negative earnings surprises. After controlling for this asymmetric price response, we find no remaining evidence of a return differential between growth and value stocks. We conclude that the inferior return to growth stocks is attributable to overoptimistic expectational errors that are corrected through subsequent negative earnings surprises.

Suggested Citation

  • Douglas J. Skinner & Richard G. Sloan, 2002. "Earnings Surprises, Growth Expectations, and Stock Returns or Don't Let an Earnings Torpedo Sink Your Portfolio," Review of Accounting Studies, Springer, vol. 7(2), pages 289-312, June.
    • Handle: RePEc:spr:reaccs:v:7:y:2002:i:2:d:10.1023_a:1020294523516
    DOI: 10.1023/A:1020294523516
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    References listed on IDEAS

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    1. Skinner, Dj, 1994. "Why Firms Voluntarily Disclose Bad-News," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 32(1), pages 38-60.
    2. Lawrence D. Brown, 2001. "A Temporal Analysis of Earnings Surprises: Profits versus Losses," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 39(2), pages 221-241, September.
    3. Skinner, Douglas J., 1997. "Earnings disclosures and stockholder lawsuits," Journal of Accounting and Economics, Elsevier, vol. 23(3), pages 249-282, November.
    4. La Porta, Rafael, 1996. "Expectations and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 51(5), pages 1715-1742, December.
    5. La Porta, Rafael, et al, 1997. "Good News for Value Stocks: Further Evidence on Market Efficiency," Journal of Finance, American Finance Association, vol. 52(2), pages 859-874, June.
    6. Freeman, Rn & Tse, Sy, 1992. "A Nonlinear Model Of Security Price Responses To Unexpected Earnings," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 30(2), pages 185-209.
    7. Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
    8. Victor Bernard & Jacob Thomas & James Wahlen, 1997. "Accounting†Based Stock Price Anomalies: Separating Market Inefficiencies from Risk," Contemporary Accounting Research, John Wiley & Sons, vol. 14(2), pages 89-136, June.
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