The Journal of Finance We postulate that changes in the beliefs of market professionals concerning the intrinsic worth of an equity would cause gradual price adjustments over time, thereby generating intermediate stock price trends. These price adjustments would be gradual over time rather than instantaneous since changes in the beliefs of market professionals concerning the fundamental value of a security would be gradually disseminated to the general investing public through advisory services, stock brokers, etc. These intermediate stock price trends provide those who specialize in the stock market with the normal profit accruing to their profession. In such a market, annual earnings reports would not be expected to materially change the beliefs of market professionals because three-fourths of their informational content was already published in the form of quarterly earnings reports. Latane and Tuttle  have shown empirically that ex-ante stock price performance is independent of ex-post annual earnings data. Quarterly earnings reports that do not differ from those anticipated from past earnings trends would not be expected to change the beliefs of market professionals concerning fundamental equity values. However, a quarterly earnings report that is significantly higher than market professionals anticipated from the firm's historical earnings trend
The Journal of Finance – Wiley
Published: Mar 1, 1970
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