In event studies of capital market efficiency, an earnings surprise has historically been measured by the consensus error, defined as earnings minus the consensus or average of professional forecasts. The rationale is that the consensus is an accurate measure of the market’s expectation of earnings. But since forecasts can be biased due to conflicts of interest and some investors can see through these conflicts, this rationale is flawed and the consensus error a biased measure of an earnings surprise. We show that the fraction of forecasts that miss on the same side (FOM), by ignoring the size of the misses, is less sensitive to such bias and a better measure of an earnings surprise. As a result, FOM out-performs the consensus error and its related robust statistics in explaining stock price movements around and subsequent to the announcement date.
Corporate Finance | Portfolio and Security Analysis
Financial Management Association European Conference 2015, June 11-12, Venice; European Finance Association 42nd Annual Meeting 2015, August 19-22, Vienna; China International Conference in Finance 2015, July 9-12, Shenzhen
Penerbit Universiti Kebangsaan Malaysia
City or Country
CHIANG, Chin-Han; DAI, Wei; FAN, Jianqing; HONG, Harrison; and TU, Jun.
When everyone misses on the same side: Debiased earnings surprises and stock returns. (2015). Financial Management Association European Conference 2015, June 11-12, Venice; European Finance Association 42nd Annual Meeting 2015, August 19-22, Vienna; China International Conference in Finance 2015, July 9-12, Shenzhen. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/5273
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