Quarterly earnings studies, Financial Management

Assignment Help:

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.

 


Related Discussions:- Quarterly earnings studies

Define how forecast the exchange rate, As of November 1, 1999, the exchange...

As of November 1, 1999, the exchange rate in between the Brazilian real and U.S. dollar is R$1.95/$. The agreement forecast for the U.S. and Brazil inflation rates for the next 1-y

How to calculate the future value of an annuity, Calculate the Future Value...

Calculate the Future Value of an Annuity: Annuity is stated as periodic payment every period for a number of periods. This periodic payment is the same each year only then it c

Explain the effect of foreigners’ portfolio investments, As the early 1980s...

As the early 1980s, foreign portfolio investors have purchased an important portion of U.S. treasury bond issues. Discuss the short-term and long-term influences of foreigners’ por

Brigham, how do legal consideration affect a firms credit policy

how do legal consideration affect a firms credit policy

Nature of current liabilities, Current Liabilities: A liability is an ...

Current Liabilities: A liability is an obligation to convey assets or do services at some future date. For purposes of balance sheet analysis, it is important to create a dist

Coefficient of variation evaluating risk of capital budget, Why is the coef...

Why is the coefficient of variation a better risk calculates to use than the standard deviation while evaluating the risk of capital budgeting projects? The coefficient of variat

BUS 430 Finance Seminar, Image Storage Corporation has 1,000,000 shares out...

Image Storage Corporation has 1,000,000 shares outstanding. It wishes to issue 500,000 new shares using a (North American) rights issue. If the current stock price is $50 and the s

State the exam technique for analysing performance, Exam technique for anal...

Exam technique for analysing performance The below steps must be adopted when answering a question on analysing performance: Step 1    Review figures as they are and commen

Net present value, What is Net Present Value? Describe please.

What is Net Present Value? Describe please.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd