Title

Return Predictability and Trends in Earnings Surprises

Publication Type

Conference Paper

Publication Date

2007

Abstract

We document that trends in firm-level earnings surprises predict returns. This finding demonstrates that consistency within the sign of multiple prior quarterly earnings surprises is important for future returns. The return predictability of trends remains after controlling for the relatively large earnings surprises that define post-earnings announcement drift. Furthermore, these large earnings surprises exert a stronger influence on future returns when they occur within trends. The return predictability of trends is not attributable to consecutive earnings surprises with the same sign nor the autocorrelation in earnings surprises. Instead, as hypothesized by Rabin's (2002) theory, investors underreact to trends.

Keywords

Earnings Surprises, Underreaction, Trends

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Financial Economics

Publication

Financial Management Association Conference

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