Quarterly earnings studies, Financial Management

Quarterly Earnings Studies

The Quarterly Earnings Studies are a part of time-series analysis. These studies aim at predicting future returns for a stock based on publicly available quarterly earnings reports.

Several studies were conducted by different groups to examine firms that experienced unanticipated changes in quarterly earnings based on three categories as to how actual earnings deviated from expectations i.e., (i) any deviation from expectations, (ii) a deviation plus or minus 20 percent, and (iii) a deviation of at least 40 percent. The study examined the abnormal price movements for all the above mentioned categories of deviations, and compared the post-announcement effects on the stocks with the earnings surprise (the amount by which the actual earnings is more than the expected results). The results of these studies suggested that favorable information contained in quarterly earnings reports is not instantaneously reflected in stock prices and a significant relationship exists between the size of the earnings surprise and the post announcement stock price change.

When the results of these studies were subsequently reviewed, it was found that the post-announcement risk-adjusted abnormal returns were consistently positive, which is inconsistent with market efficiency. The abnormal returns could be due to problems in the CAPM and not due to market inefficiencies.

Recent studies use the concept of the Standardized Unexpected Earnings (SUE), which normalizes the difference between actual and expected earnings for the quarter by the standard error of estimate from the regression used to derive the expected earnings figure, instead of just examining the percentage differences between actual and expected results. The SUE can be defined as:

 

The standard error of a statistic is the standard deviation of the sampling distribution of that statistic. Standard errors are important because they reflect how much sampling fluctuation a statistic will show. The standard error of a statistic depends on the sample size. In general, the larger the sample size, the smaller the standard error. The standard error of a statistic is usually designated by the Greek letter sigma (s) with a subscript indicating the statistic. For instance, the standard error of the mean is indicated by the symbol: sM.

 

Posted Date: 9/11/2012 6:09:50 AM | Location : United States







Related Discussions:- Quarterly earnings studies, Assignment Help, Ask Question on Quarterly earnings studies, Get Answer, Expert's Help, Quarterly earnings studies Discussions

Write discussion on Quarterly earnings studies
Your posts are moderated
Related Questions
What are some of the factors that common stockholders consider when deciding how much, if any, cash dividends they desire from the corporation in which they have invested? Gene

Explain the Post-acquisition integration plan Post-acquisition integration plan Keep  all  channels  of communications open,  by  includin

briefly discuss the three approaches to the short-term financing problems and examples of each

Describe in brief about  finance Managing this flow of funds resourcefully is the purview of finance. So we can describe finance as the study of the methods that help us plan,

Question: Susan started her current job at age 30, with the normal retirement age at 60. The remuneration package of her employment includes the following benefits on top of he

Talbot Enterprises recently reported an EBITDA of $8 million and net income of $2.4 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was i

What are the negative consequences of a company holding too much cash? A company holding in excess of cash would be giving up the opportunity to invest more in income producing

Define risk. Examine the need for assessing the risks in a project

what are some of the skills in asmall scale business

Suggestion regarding Credit limit. Should it be approved or not, what should be the amount of credit limit that electronics give to Booth Plastics.