Stock performance subsequent to combinations in quarterly revenue surprise, earnings surprise, guidance, valuation, and
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Stock performance subsequent to combinations in quarterly revenue surprise, earnings surprise, guidance, valuation, and report time Jose I. Alvarado 1 & Lindsay C. Clark 1 & Jose A. Gutierrez 2 Accepted: 1 October 2020/ # Academy of Economics and Finance 2020
Abstract Finance literature highlights various reasons for stock performance subsequent to earnings announcements. However, other moving parts in these scenarios must also be simultaneously specified. While both revenue and earnings surprises are important for determining stock performance, forward-looking guidance and firm valuation prior to earnings should also be considered. Additionally, analyses that solely consider market-level data miss important subtleties evident in a sector-specific study, as “normal” growth and valuation metrics across sectors widely differ. We differentiate between firms that announce earnings during the evening hours (after the close) and firms that announce earnings during the morning hours (prior to the open). Keywords Quarterly expectations . Analyst consensus . Guidance . Trading strategy JEL classification G11 . G12 . G14 . G17
1 Introduction Every three months, publicly-traded firms present summaries of their most recent quarter to the investing public. These firms highlight, among other things, realized quarterly revenue, realized quarterly earnings per share, and forward-looking guidance for both revenue and earnings. For most firms, information of this sort is shared with the investing public only four times each year—during the quarterly earnings call. In between any two earnings dates, however, stock analysts, from a
* Jose A. Gutierrez [email protected]
1
Sam Houston State University, Huntsville, TX, USA
2
Department of General Business and Finance, Sam Houston State University, Box 2056, Huntsville, TX 77341, USA
Journal of Economics and Finance
host of financial institutions, attempt to model the firm’s revenue and earnings using their own assumptions regarding the business. Each analyst group puts forth their expectations of quarterly revenue and earnings. This takes place weeks, and even sometimes days, prior to the actual earnings call. When taken together, and averaged, we get what is commonly known as the “market’s expectations” with respect to revenue and earnings. As each new analyst group submits its forecast for revenue and earnings, the market’s expectation is updated to reflect this new information. The resulting dynamic is a scenario in which the market expects certain levels of revenue and earnings as the firm presents the actual metrics. Thus, theoretically, if a firm produces results that exactly match the consensus estimates, and also provides guidance that matches the expectations of the market, then nothing new would be learned through the earnings statement, and the stock should remain relatively unchanged. On the other hand, if a firm produces results that differ significantly from the consensus estimates and/or provides guidance that is either higher or lower than previously anticipated,
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