Bernard & Thomas (1990)

Reference

Evidence That Stock Prices Do Not Fully Reflect the Implications of Current Earnings for Future Earnings^aaa

Victor L. Bernard and Jacob K. Thomas

The Journal of Accounting and Economics, Volume 13 (1990), 305-340.

Synopsis

This paper provides evidence that stock prices do not reflect the implications of current earnings for future earnings. Specifically, the paper finds that firms with earnings surprises in the current quarter are more likely to experience earnings surprises of the same sign over the subsequent 3 quarters, but that stock prices do not anticipate these predictable surprises. The annual hedge portfolio return to longing positive surprise firms and shorting negative surprise firms exceeds 8%. While this so called 'post-earnings-announcement drift' had been previously documented, this was the first paper to neatly tie it to momentum in quarterly earnings surprises.