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Earnings Surprises vs Earnings Revisions

Earnings Surprises vs Earnings Revisions. Taco Bandito: Allen Born Mark Davidson Greg Dayko Stephanie Shayne Ed Shenkan. Overview. Comparison of Surprises to Revisions Implementation Results Why it Works? Caveats Taco Test. Description of Strategy.

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Earnings Surprises vs Earnings Revisions

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  1. Earnings Surprises vs Earnings Revisions Taco Bandito: Allen Born Mark Davidson Greg Dayko Stephanie Shayne Ed Shenkan

  2. Overview • Comparison of Surprises to Revisions • Implementation • Results • Why it Works? • Caveats • Taco Test

  3. Description of Strategy • Earnings Surprises: Accounting-Based Earnings Momentum Strategy that exploits market under-reactions to earnings surprises • Earnings Revisions: Accounting-Based Strategy that exploits market under-reactions to revisions in earnings estimates.

  4. Implementation-Surprises • Created portfolios for the months March, June, September, December 1990-1999 • Compute the Surprise (% differential of Actual EPS to Expected EPS) • Long: top 5 % Surprisers • Short: bottom 5 % Surprisers • Equal weighting in longs and shorts • Held portfolios for 6 months

  5. Implementation-Revisions • Created portfolios for the months March, June, September, December 1990-1999 • Compute the Revision (% Change in expected EPS) • Long: top 5 % Revisions • Short: bottom 5 % Revisions • Equal Weighting in Longs and Shorts • Held portfolios for 6 months

  6. Results

  7. Results

  8. Why it works? • Prices of equities for companies recently announcing earnings surprises are mispriced • Investors under-react to changes in earnings • Mean reverting • Anchoring bias

  9. Caveats • We used quarterly EPS estimates for revisions - Not annual EPS • Quarterly changes could be impacted by • Seasonality • Unusual circumstances/Extraordinary Earnings • We only included stocks which are presently in the S&P 500 (i.e. Yahoo instead of Laidlaw) • Used IBES returns

  10. Taco Test • To eliminate seasonality, compared earnings forecast for same quarter of prior year

  11. Questions & Answers

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