Are earnings predictable?
- 34 Downloads
We find that market reactions to earnings announcements can be predictable. Four-factor abnormal returns to earnings announcements that follow buyback announcements are higher by 5.1% than similar returns to earnings announcements that follow equity issues over the (− 1,+ 30) window; the difference is 2.2% when unadjusted returns are used. The magnitude is large and economically and statistically significant. The drift in these returns is unrelated and distinct from the post-earnings announcement drift. For example, we find positive drift for firms making buyback announcements even when they exhibit negative earnings surprises and find negative drift for firms issuing equity even when they show positive earnings surprises. Since the study looks at short periods around earnings announcements, it does not suffer from benchmarking errors that may influence long-horizon returns.
KeywordsEarnings predictability Buybacks/Repurchases Equity issues SEOs Information asymmetry Market efficiency
JEL ClassificationG14 G32 G35
- Du Q, Shen R (2018) Peer performance and earnings management. Journal of Banking & Finance (Forthcoming)Google Scholar
- Eckbo B, Masulis RW, Norli Ø (2007) Security offerings. In: Eckbo B (ed) Handbook of Corporate Finance: Empirical Corporate Finance, Handbooks in Finance, vol 1, Elsevier, Chapter 6, pp 233– 373Google Scholar
- Edelen RM, Ince OS, Kadlec GB (2014) Post-SEO performance and institutional investors. Unpublished working paper, Virginia TechGoogle Scholar
- Kothari SP, Warner JB (2007) Econometrics of event studies. In: Eckbo B (ed) Handbook of Corporate Finance: Empirical Corporate Finance, Handbooks in Finance, vol 1, Elsevier, chapter 1, pp 3–36Google Scholar