Earnings announcements often convey earnings surprises. An earnings surprise is the difference between the actual earnings number reported by a company’s management and the market’s expectations of what the actual number was going to be. A positive surprise means that the actual earnings are higher than expectations, and a negative surprise means the opposite.4
An earnings surprise is typically informative, new news (as opposed to useless, stale information, which is not an obvious point, given the 24/7 news cycle). Because of this, earnings announcements are usually met with significant price reactions when the news is released. We analyzed 82,507 earnings surprises during the 1984–2009 sample period.5 Our analysis revealed that on average the quarterly earnings surprise was –7.49%, but the median earnings surprise was 0.69%. This suggests that more than half the earnings surprises are positive, but there are some very large negative surprises. The 75th percentile earnings surprise was 9.43% (so the top 25% of all earnings surprises were larger than 9.43%) and the 25th percentile earnings surprise was –4.41% (the bottom 25% of all earnings surprises were more negative than –4.41%). These results suggest that a significant number of earnings surprises spanning the last 26 years have been quite large. Imagine how the market reacts when it expects $1.00 of EPS but is greeted with an announcement that actual earnings were $1.09 or $0.96. Over the years 1984–2009, there was a steady decline of negative earnings surprises and a steady increase of positive earnings surprises. More important, the number of zero surprises declined sharply in the past decade. This means that despite the abundance of information in today’s non-stop news cycle, earnings surprises seem to be even more common now than they were ten years ago.