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Earnings Surprise

Definition

An earnings surprise, or unexpected earnings, in accounting, is the difference between the reported earnings and the expected earnings of an entity. Measures of a firm's expected earnings, in turn, include analysts' forecasts of the firm's profit and mathematical models of expected earnings based on the earnings of previous accounting periods.

What is an 'Earnings Surprise'

An earnings surprise occurs when a company's reported quarterly or annual profits are above or below analysts' expectations. These analysts, who work for a variety of financial firms and reporting agencies, base their expectations on a variety of sources - previous quarterly or annual reports, current market conditions, as well as the company's own earnings' predictions or "guidance."

Explaining 'Earnings Surprise'

Earnings surprises can have a huge impact on a company's stock price. Several studies suggest that positive earnings surprises not only lead to an immediate hike in a stock's price, but also to a gradual increase over time. Hence, it's not surprising that some companies are known for routinely beating earning projections. A negative earnings surprise will usually result in a decline in share price.


Further Reading


Liquidity and the post-earnings-announcement drift
www.tandfonline.com [PDF]
… A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a … Journal of Behavioral Finance Latest Articles. Published online: 28 Mar 2019. Article. Post-Earnings-Announcement Drift: The Role of Revenue Surprises …

Earnings surprise research: Synthesis and perspectivesEarnings surprise research: Synthesis and perspectives
www.tandfonline.com [PDF]
… A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a … Journal of Behavioral Finance Latest Articles. Published online: 28 Mar 2019. Article. Post-Earnings-Announcement Drift: The Role of Revenue Surprises …

Managing earnings surprises in the US versus 12 other countriesManaging earnings surprises in the US versus 12 other countries
www.sciencedirect.com [PDF]
… A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a … Journal of Behavioral Finance Latest Articles. Published online: 28 Mar 2019. Article. Post-Earnings-Announcement Drift: The Role of Revenue Surprises …

Comparing the post–earnings announcement drift for surprises calculated from analyst and time series forecastsComparing the post–earnings announcement drift for surprises calculated from analyst and time series forecasts
onlinelibrary.wiley.com [PDF]
… A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a … Journal of Behavioral Finance Latest Articles. Published online: 28 Mar 2019. Article. Post-Earnings-Announcement Drift: The Role of Revenue Surprises …

An empirical test of the signaling effect of management's earnings forecasts: A decomposition of the earnings surprise and forecast surprise effectsAn empirical test of the signaling effect of management's earnings forecasts: A decomposition of the earnings surprise and forecast surprise effects
journals.sagepub.com [PDF]
… A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a … Journal of Behavioral Finance Latest Articles. Published online: 28 Mar 2019. Article. Post-Earnings-Announcement Drift: The Role of Revenue Surprises …

Contrarian share price reactions to earnings surprisesContrarian share price reactions to earnings surprises
journals.sagepub.com [PDF]
… A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a … Journal of Behavioral Finance Latest Articles. Published online: 28 Mar 2019. Article. Post-Earnings-Announcement Drift: The Role of Revenue Surprises …

Audit tenure and earnings surprise managementAudit tenure and earnings surprise management
www.emerald.com [PDF]
… A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a … Journal of Behavioral Finance Latest Articles. Published online: 28 Mar 2019. Article. Post-Earnings-Announcement Drift: The Role of Revenue Surprises …

Post-earnings announcement abnormal return in the Chinese equity marketPost-earnings announcement abnormal return in the Chinese equity market
www.sciencedirect.com [PDF]
… A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a … Journal of Behavioral Finance Latest Articles. Published online: 28 Mar 2019. Article. Post-Earnings-Announcement Drift: The Role of Revenue Surprises …

Stock returns, aggregate earnings surprises, and behavioral financeStock returns, aggregate earnings surprises, and behavioral finance
www.sciencedirect.com [PDF]
… A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a … Journal of Behavioral Finance Latest Articles. Published online: 28 Mar 2019. Article. Post-Earnings-Announcement Drift: The Role of Revenue Surprises …



Q&A About Earnings Surprise


What is an earnings surprise?

An earnings surprise occurs when a company's reported quarterly or annual profits are above or below analysts' expectations.

What happens when there is negative surprise?

A negative surprise will usually result in decline in share price.

Who first proposed this theory?

Ray J. Ball and P. Brown, "An empirical evaluation of accounting income numbers," Journal of Accounting Research, Autumn 1968, pp. 159–178.

How do analysts predict future earnings of companies?

Analysts use a variety of sources such as previous reports, current market conditions, and the company's own predictions to make their predictions.

Why do stocks tend to have higher or lower returns after an earnings announcement?

The phenomenon occurs because investors are slow to incorporate new information into their stock prices.

Who are some companies that routinely beat earning projections?

Some companies that routinely beat earning projections include Apple Inc., Amazon Inc., Alphabet Inc., and Facebook Inc..

What is post-earnings announcement drift?

Post-earnings announcement drift is a tendency for stocks to have cumulative abnormal returns that drift in the direction of an earnings surprise.

What does it mean for investors if they wait too long to incorporate new information into their stock price?

Investors who wait too long may miss out on opportunities that present themselves when the market adjusts its price based on new information.

Why are positive surprises important for a stock price?

Positive surprises will result in an immediate hike in a stock price as well as gradual increase over time.

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