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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.
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    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.
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    Cited by:

    1. Andrew C. Call & Shuping Chen & Yen H. Tong, 2009. "Are analysts’ earnings forecasts more accurate when accompanied by cash flow forecasts?," Review of Accounting Studies, Springer, vol. 14(2), pages 358-391, September.
    2. Joseph Legoria & Kevin D. Melendrez & J. Kenneth Reynolds, 2013. "Qualitative audit materiality and earnings management," Review of Accounting Studies, Springer, vol. 18(2), pages 414-442, June.
    3. Theodore E. Christensen & Kenneth J. Merkley & Jennifer Wu Tucker & Shankar Venkataraman, 2011. "Do managers use earnings guidance to influence street earnings exclusions?," Review of Accounting Studies, Springer, vol. 16(3), pages 501-527, September.
    4. Andrew C. Call & Shuping Chen & Bin Miao & Yen H. Tong, 2014. "Short-term earnings guidance and accrual-based earnings management," Review of Accounting Studies, Springer, vol. 19(2), pages 955-987, June.
    5. Mary E. Barth & Amy P. Hutton, 2004. "Analyst Earnings Forecast Revisions and the Pricing of Accruals," Review of Accounting Studies, Springer, vol. 9(1), pages 59-96, March.
    6. Sarah McVay & Venky Nagar & Vicki Wei Tang, 2006. "Trading incentives to meet the analyst forecast," Review of Accounting Studies, Springer, vol. 11(4), pages 575-598, December.
    7. Xia Chen & Qiang Cheng & Xin Wang, 2015. "Does increased board independence reduce earnings management? Evidence from recent regulatory reforms," Review of Accounting Studies, Springer, vol. 20(2), pages 899-933, June.
    8. William Ciconte & Marcus Kirk & Jennifer Wu Tucker, 2014. "Does the midpoint of range earnings forecasts represent managers’ expectations?," Review of Accounting Studies, Springer, vol. 19(2), pages 628-660, June.
    9. Abe Jong & Gerard Mertens & Marieke Poel & Ronald Dijk, 2014. "How does earnings management influence investor’s perceptions of firm value? Survey evidence from financial analysts," Review of Accounting Studies, Springer, vol. 19(2), pages 606-627, June.
    10. Yong Gyu Lee, 2014. "An examination of restructuring charges surrounding the implementation of SFAS 146," Review of Accounting Studies, Springer, vol. 19(2), pages 539-572, June.
    11. Lynn Rees, 2005. "Abnormal Returns from Predicting Earnings Thresholds," Review of Accounting Studies, Springer, vol. 10(4), pages 465-496, December.
    12. Diana R. Franz & Hassan R. HassabElnaby & Gerald J. Lobo, 2014. "Impact of proximity to debt covenant violation on earnings management," Review of Accounting Studies, Springer, vol. 19(1), pages 473-505, March.
    13. Dora Altschuler & Gary Chen & Jie Zhou, 2015. "Anticipation of management forecasts and analysts’ private information search," Review of Accounting Studies, Springer, vol. 20(2), pages 803-838, June.
    14. Yongtae Kim & Myung Seok Park, 2012. "Are all management earnings forecasts created equal? Expectations management versus communication," Review of Accounting Studies, Springer, vol. 17(4), pages 807-847, December.
    15. Michael S. Drake & Linda A. Myers, 2011. "Analysts’ accrual-related over-optimism: do analyst characteristics play a role?," Review of Accounting Studies, Springer, vol. 16(1), pages 59-88, March.
    16. Charles Ham & Mark Piorkowski & Nick Seybert & Sean Wang, 2025. "CFO narcissism and the power of persuasion over analysts: a mixed-methods approach," Review of Accounting Studies, Springer, vol. 30(3), pages 2419-2467, September.

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