Earnings Surprises, Growth Expectations, and Stock Returns

Question 1

Hypotheses:

Answer 1

1) we predict an asymmetrically large negative stock return for growth stocks reporting negative earnings surprises. This asymmetrically large stock return arises as the negative earnings surprises cause investors to revise downwards their previously overoptimistic expectations.
2) we predict that the entire return differential between growth stocks and other stocks will be realized during periods in which negative earnings surprises are reported.

Question 2

Findings:

Answer 2

Growth stocks exhibit an asymmetrically large negative price response to negative earnings surprises and show that this asymmetric response to negative earnings surprises explains the return differential between ‘growth’ and ‘value’ stocks.

Question 3

WHEN inferior performance of growth stocks?

Answer 3

concentrated in the 31 days leading up to quarterly earnings announcements, when most earnings-related news is released

Question 4

Why little return difference on the announcement day?

Answer 4

We find that relatively little of the return differential is observed at the formal earnings announcement date, presumably because managers of growth firms tend to preannounce negative earnings surprise.