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Market Reactions to Earnings Surprises Are Full of Surprises

The market tends to react positively to positive earnings surprises and negatively to negative earnings surprises. However, this is not always the case; in fact, almost 40% of all positive earnings surprises were met with negative excess market reactions on the order of –2%. There were 10% of positive earnings surprises that had returns of –5% or worse. A similar outcome was found for negative earnings surprises. Ten percent of all negative earnings surprises were clocking +4% excess returns. At the 10th and 90th percentiles, even the announcements where companies are “just meeting expectations” (the zero earnings surprise group) were met with close to 6% absolute excess market reactions. Thus, for a significant portion of the population, an earnings surprise is going to be met with a market reaction going in the opposite direction of the surprise. Table 1.2 makes this clear. Specifically, over the three-day window, 39.45% of positive earnings surprises had negative stock returns, and 38.95% of the negative earnings surprises had positive stock returns.

Table 1.2. Proportion of Positive and Negative Excess Returns for Positive, Zero, and Negative Earnings Surprises


3-Day Window Return



Positive Excess Return (≥ 0)

Negative Excess Return (<0)

Positive Earnings Surprise



Zero Earnings Surprise



Negative Earnings Surprise



This finding implies that even if you are very skilled in forecasting earnings surprises, you can still incur significant trading losses because the market reactions to these surprises so often go in the opposite direction. There is no evidence that this opposite-reaction phenomenon is diminishing over time. In fact, there is a case to be made that market reactions overall are becoming more severe, not less.

Why do so many earnings surprises have returns in the opposite direction? There are many possible reasons to explain this surprising result, but two reasons stand out. First, the content of an earnings announcement includes many other pieces of value-relevant information besides the earnings number itself. Earnings announcement returns reflect the market’s reactions to all such information rather than earnings surprises alone. For example, managers might provide their general outlook for the business and specific sales and earnings guidance for the next quarter. If the guidance falls short of the market’s expectations, a positive earnings surprise could be overwhelmed by the negative influence of the lowered guidance (or vice versa). Second, it’s possible that the earnings surprises calculated in studies such as ours are not the “true” earnings surprises, because there are all kinds of issues in measuring the market’s actual expectations. That is, these measures are proxies for an underlying consensus number that no one actually knows for certain.

Predicting the direction of earnings surprises is a very difficult task. Moreover, even if the earnings surprises were perfectly predicted, the market’s reactions to these surprises can go in the opposite direction. This empirical regularity has important implications for how you can exploit potential trading strategies around earnings announcements.

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