Standardized Unexpected Earnings—1971–77

Abstract

A RECENT ARTICLE IN this journal [5] measured the informational content of quarterly earnings reports and the effects of this information on stock prices. The empirical evidence presented, covering early 1971 through mid-1974, suggested that unexpected earnings were very significantly related to excess holding period returns and that the adjustment to the unexpected earnings was relatively slow. The semi-strong form of the Efficient Capital Market Hypothesis, while based on the postulate that stock prices respond to unanticipated earnings, leads to the additional hypothesis that the market response to unanticipated earnings changes occurs either before or simultaneously with publication of earnings and hence that unexpected earnings is not significantly correlated with excess returns for any period beginning after the publication date. As Sharpe [7] has noted: If better-than-expected earnings announcements indicate attractive opportunities for stock purchases days or weeks after the announcement has been made, the market is not performing in a perfectly efficient manner. The importance of this issue led us to perform additional tests with updated data in an attempt to answer the following questions (with answers contained in the cited tables): 1. What is the distribution of SUE (standardized unexpected earnings)? (Table 1) 2. Were cumulative returns related to unexpected earnings in the period 1974