The Profits and Pitfalls of Earnings Surprises – SCMP’s Education Post Article on Research by IEMS’ Mingyi Hung


SCMP Education Post published a research summary by IEMS’ Mingyi Hung examining how earnings surprises have triggered standard market responses affecting stock price. Also discussed are the trading strategies built around this phenomenon, and the challenges of such strategies for investors.

Earnings surprises have been shown repeatedly to trigger standard responses from the market: if the surprise is a large earnings increase, the stock price will go up, and if it is a large decrease, the stock price will go down. Successful trading strategies have been built around this phenomenon, but research by Professor Mingyi Hung suggests that recent accounting developments are making such strategies more challenging for investors.

Her focus is post-earnings announcement drift (PEAD), in which stocks keep moving in the same direction months after the surprise earnings announcement. Studies have shown that trading strategies based on that drift can result in higher quarterly returns of two per cent to seven per cent.

“But before investors run away and work on this strategy, they need to consider why it happens and why it persists. How might profitability from this kind of signal vary across firms? If you know the answer to that, you could have a differential advantage and won’t be surprised by subsequent changes,” she said.

Read the full article here.

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