Extent of equity price reactions to earnings surpise and investor recommendations

Abstract

In this paper we examine the role of earnings surprise (1), in determining the price reactions of the shares listed on the National Stock Exchange of India. The stock movements studied are not just post-announcement stock reactions, but also pre-earnings stock movements, so as to determine the extent of earnings surprise factored into the stock price before and after the earnings announcement date. Our results obtained via an empirical analysis of the share prices over a period of 120 days and via statistical techniques show the existence of postearnings drift in the share prices. Similarly, there also exist pre-announcement price effects, and no sudden change from an upward trend to a downward trend and vice versa on the day of the earnings announcement. Thus, the market tries to factor in the earnings surprise impact before the announcement date itself based on management announcements and analyst predictions. Finally, from our analysis of the earnings surprise we were finally able to come up with short-term investment strategies for the Indian investor, for preventing steep downsides on certain portfolios and for earning reasonable profits on other portfolios (classified on the basis of level of earnings surprise)