Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns

We present evidence consistent with markets failing to properly price information in seasonal earnings patterns. Firms with historically larger earnings in one quarter of the year ("positive seasonality quarters") have higher returns when those earnings are usually announced. Analysts have...

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Bibliographic Details
Published in:The Review of financial studies 2017-01, Vol.30 (1), p.281-323
Main Authors: Chang, Tom Y., Hartzmark, Samuel M., Solomon, David H., Soltes, Eugene F.
Format: Article
Language:English
Subjects:
Earnings announcements
Earnings forecasting
Investment policy
Rates of return
Risk factors
Seasonal variations
Studies
Volatility
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Summary:We present evidence consistent with markets failing to properly price information in seasonal earnings patterns. Firms with historically larger earnings in one quarter of the year ("positive seasonality quarters") have higher returns when those earnings are usually announced. Analysts have more positive forecast errors in positive seasonality quarters, consistent with the returns being driven by mistaken earnings estimates. We show that investors appear to overweight recent lower earnings following positive seasonality quarters, leading to pessimistic forecasts in the subsequent positive seasonality quarter. The returns are not explained by risk-based explanations, firm-specific information, increased volume, or idiosyncratic volatility.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhw044