Abstract
Earnings surprise occurs when the firms reported earnings per share deviates from the street estimate. This study shows that earnings surprises are useful in identifying portfolios that yield excess returns in the U.S. tech sector. The tech portfolios with the most positive earnings surprises outperformed the tech portfolios with the most negative earnings surprises in terms of both mean and median returns in the U.S. stock market. The study demonstrates that arbitrage profits could be generated if investors bought (short sold) the tech stocks with the highest earnings surprises (the lowest) two or three months after the end of the quarter. The study demonstrates that this trading strategy is most effective when fewer rather than more financial analysts follow the firms.
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