Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns

Tom Y. Chang; Samuel M. Hartzmark; David H. Solomon; Eugene F. Soltes

Article | Review of Financial Studies | January 2017

Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns

by Tom Y. Chang, Samuel M. Hartzmark, David H. Solomon and Eugene F. Soltes

Abstract

We present evidence consistent with markets failing to properly price information in seasonal earnings patterns. Firms with historically larger earnings in one quarter of the year (“positive seasonality quarters”) have higher returns when those earnings are usually announced. Analysts have more positive forecast errors in positive seasonality quarters, consistent with the returns being driven by mistaken earnings estimates. We show that investors appear to overweight recent lower earnings following positive seasonality quarters, leading to pessimistic forecasts in the subsequent positive seasonality quarter. The returns are not explained by risk-based explanations, firm-specific information, increased volume, or idiosyncratic volatility.

Keywords: Business Earnings; Investment;

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Citation:

Chang, Tom Y., Samuel M. Hartzmark, David H. Solomon, and Eugene F. Soltes. "Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns." Review of Financial Studies 30, no. 1 (January 2017): 281–323.

There are numerous restrictions against trading on material, nonpublic information (MNPI)—typically called “insider trading.” This note describes the limitations facing managers and investors as enforced civilly and criminally within the United States.

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Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns

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