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  • Is trading on earnings surprises a profitable strategy? Canadian evidence

    Author(s)
    Chudek, Mark
    Truong, Cameron
    Veeraraghavan, Madhu
    Griffith University Author(s)
    Veeraraghavan, Madhu
    Year published
    2011
    Metadata
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    Abstract
    This study examines the profitability of trading on earnings surprises in the post-earnings announcement period for Canadian equities spanning the period 1994–2009. There is clear evidence that stock prices drift in the direction of earnings surprise for several months following an earnings announcement. Specifically, we find that standardized unexpected earnings based on analyst forecasts (SUEAF), our main definition of earnings surprise, indicates that a hedge strategy of going long on firms in the highest SUEAF decile and going short on firms in the lowest SUEAF decile generates a greater than 6% excess return in the 60 ...
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    This study examines the profitability of trading on earnings surprises in the post-earnings announcement period for Canadian equities spanning the period 1994–2009. There is clear evidence that stock prices drift in the direction of earnings surprise for several months following an earnings announcement. Specifically, we find that standardized unexpected earnings based on analyst forecasts (SUEAF), our main definition of earnings surprise, indicates that a hedge strategy of going long on firms in the highest SUEAF decile and going short on firms in the lowest SUEAF decile generates a greater than 6% excess return in the 60 days following the earnings announcement. We also show that that while both the SUEAF and standardized unexpected earnings (SUE) capture earnings surprise, each contains information that is not entirely subsumed by the other. In summary, we advance that the post-earnings announcement drift is caused by the market's delay in responding to earnings information. Our findings have major investment implications, since investors in general and Canadian investors in particular can exploit this anomaly.
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    Journal Title
    Journal of International Financial Markets, Institutions and Money
    Volume
    21
    Issue
    5
    DOI
    https://doi.org/10.1016/j.intfin.2011.06.004
    Subject
    Banking, Finance and Investment not elsewhere classified
    Applied Economics
    Banking, Finance and Investment
    Publication URI
    http://hdl.handle.net/10072/172412
    Collection
    • Journal articles

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