Earnings Surprises, Growth Expectations, and Stock Returns:
Earnings Surprises, Growth Expectations, and Stock Returns or Don’t Let an Earnings Torpedo Sink Your Portfolio ∗ Douglas J. Skinner** and Richard G. Sloan University of Michigan Business School First Version: May 1998 This Version: January 2000 Abstract It is well established that the realized returns of ‘growth’ stocks have been low relative to other stocks. We show that this phenomenon is explained by a large and asymmetric response to negative earnings surprises for growth stocks. After controlling for this effect, there is no longer evidence of a stock return differential between growth stocks and other stocks. Our evidence is consistent with investors having naively optimistic expectations about the prospects of growth stocks (e.g., Lakonishok, Shleifer, and Vishny, 1994). JEL Classification: G12, G14, M41. Keywords: Abnormal returns; Earnings surprises; Growth stocks. ∗ We are grateful for the comments of workshop participants at Cornell University, Harvard University, the University of North Carolina, the University of Oregon, the University of Pennsylvania, the University of Rochester, and the University of Washington, the 5 th Annual Chicago Quantitative Alliance Conference, and the 13 th Annual Prudential Quantitative Conference. We thank I/B/E/S for providing EPS forecast data. Skinner appreciates financial support from KPMG. All errors are our own. **Address all correspondence to Skinner at University of Michigan Business School, 701 Tappan Street, Ann Arbor, MI 48109-1234. Phone: (734) 764-1239; Fax: (734) 936-0282; Email: firstname.lastname@example.org.
Quarters from: (no. of obs.) Year 5
Quarters from: (no. of obs.) Year 1
Table 6 Estimated Coefficients (adj
Table 7 Estimated Coefficients (adj