Streaks in Earnings Surprises and the Cross-Section of Stock Returns
The gambler’s fallacy (Rabin, 2002) predicts that trends bias investor expectations. Consistent with this prediction, we find that investors underreact to streaks of consecutive earnings surprises with the same sign. When the most recent earnings surprise extends a streak, post-earnings announcement drift is strong and significant. In contrast, the drift is negligible following the termination of a streak. Indeed, streaks explain the majority of post-earnings announcement drift in our sample. Our results are robust to more general definitions of trends than streaks and a battery of control variables including the magnitude of earnings surprises and their autocorrelation. Overall, the cross-sectional post-earnings announcement drift anomaly has a significant time-series component that is consistent with the gambler’s fallacy.