Earnings Surprises, Growth Expectations, and Stock Returns or Don't Let an Earnings Torpedo Sink Your Portfolio

Earnings Surprises, Growth Expectations, and Stock Returns or Don't Let an Earnings Torpedo Sink... We provide new evidence that the inferior returns to growth stocks relative to value stocks are the result of expectational errors about future earnings performance. Our evidence demonstrates that growth stocks exhibit an asymmetric response to earnings surprises. We show that while growth stocks are at least as likely to announce negative earnings surprises as positive earnings surprises, they exhibit an asymmetrically large negative price response to negative earnings surprises. After controlling for this asymmetric price response, we find no remaining evidence of a return differential between growth and value stocks. We conclude that the inferior return to growth stocks is attributable to overoptimistic expectational errors that are corrected through subsequent negative earnings surprises. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Earnings Surprises, Growth Expectations, and Stock Returns or Don't Let an Earnings Torpedo Sink Your Portfolio

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2002 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1020294523516
Publisher site
See Article on Publisher Site

Abstract

We provide new evidence that the inferior returns to growth stocks relative to value stocks are the result of expectational errors about future earnings performance. Our evidence demonstrates that growth stocks exhibit an asymmetric response to earnings surprises. We show that while growth stocks are at least as likely to announce negative earnings surprises as positive earnings surprises, they exhibit an asymmetrically large negative price response to negative earnings surprises. After controlling for this asymmetric price response, we find no remaining evidence of a return differential between growth and value stocks. We conclude that the inferior return to growth stocks is attributable to overoptimistic expectational errors that are corrected through subsequent negative earnings surprises.

Journal

Review of Accounting StudiesSpringer Journals

Published: Oct 21, 2004

References

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