Contrarian share price reactions to earnings surprises

Abstract

A persistent (but overlooked) feature of the cross-sectional distribution of quarterly earnings announcement returns is that the measured earnings surprise and share price response to that surprise are often in the opposite direction. Extending the study by Kinney, Burgstahler, and Martin, this study provides evidence on the prevalence, determinants, and consequences of contrarian stock returns at the earnings announcement date. Using the most recent Institutional Brokers' Estimate System (I/B/E/S) consensus earnings per share forecast as the earnings benchmark, the authors find that contrarian returns occur for roughly 40% of the more than 230,000 quarterly earnings announcements that comprise their sample. Contrarian returns are only slightly less prevalent in extreme earnings surprise deciles and are evident each quarter during 1985-2005. The incidence of contrarian returns is statistically related to "noise" in the measured earnings surprise (stale I/B/E/S consensus forecasts, preannouncement stock returns, and the presence of Generally Accepted Accounting Principles [GAAP] exclusions) and "noise" in the share price response to announced earnings (discordant revenue changes, discordant earnings forecast revisions, return volatility, bid-ask spread, and discordant prior quarter earnings surprises). Finally, contrarian stocks exhibit little post-earnings-announcement drift. © 2012 The Author(s).