Definition
An earnings surprise, or unexpected earnings, in accounting, is the difference between the reported earnings and the expected earnings of an entity. Measures of a firm’s expected earnings, in turn, include analysts’ forecasts of the firm’s profit and mathematical models of expected earnings based on the earnings of previous accounting periods.
Earnings Surprise
What is an ‘Earnings Surprise’
An earnings surprise occurs when a company’s reported quarterly or annual profits are above or below analysts’ expectations. These analysts, who work for a variety of financial firms and reporting agencies, base their expectations on a variety of sources – previous quarterly or annual reports, current market conditions, as well as the company’s own earnings’ predictions or “guidance.”
Explaining ‘Earnings Surprise’
Earnings surprises can have a huge impact on a company’s stock price. Several studies suggest that positive earnings surprises not only lead to an immediate hike in a stock’s price, but also to a gradual increase over time. Hence, it’s not surprising that some companies are known for routinely beating earning projections. A negative earnings surprise will usually result in a decline in share price.
Further Reading
- Liquidity and the post-earnings-announcement drift – www.tandfonline.com [PDF]
- Earnings surprise research: Synthesis and perspectives – www.tandfonline.com [PDF]
- Managing earnings surprises in the US versus 12 other countries – www.sciencedirect.com [PDF]
- Comparing the post–earnings announcement drift for surprises calculated from analyst and time series forecasts – onlinelibrary.wiley.com [PDF]
- An empirical test of the signaling effect of management's earnings forecasts: A decomposition of the earnings surprise and forecast surprise effects – journals.sagepub.com [PDF]
- Contrarian share price reactions to earnings surprises – journals.sagepub.com [PDF]
- Audit tenure and earnings surprise management – www.emerald.com [PDF]
- Post-earnings announcement abnormal return in the Chinese equity market – www.sciencedirect.com [PDF]
- Stock returns, aggregate earnings surprises, and behavioral finance – www.sciencedirect.com [PDF]
