Earnings Revisions & SUE
Markets underreact to earnings news. Drift persists for months.
Typical IS Sharpe
0.5 – 0.8
Typical OOS Sharpe
0.2 – 0.5
Capacity
Small-cap
Signal decay
~3m half-life
Overview
Post-earnings announcement drift (PEAD) is the finding that stock prices continue moving in the direction of earnings surprises for weeks to months after the announcement. Ball and Brown (1968) first documented this inefficiency; Bernard and Thomas (1989) showed the drift is too large to explain by transaction costs alone, making it a genuine anomaly. Standardized Unexpected Earnings (SUE) — earnings growth relative to analyst expectations — is the most common signal. Chan, Jegadeesh, and Lakonishok (1996) showed that earnings momentum and price momentum are related but not identical, and combining them improves predictive power.
Economic Intuition
The dominant explanation is behavioral: investors anchor on prior earnings levels and update too slowly to earnings surprises, causing prices to drift toward the full-information value over subsequent quarters. The effect is stronger for firms with less analyst coverage and greater information uncertainty, consistent with a slow diffusion of information story. Risk-based explanations struggle to account for the predictability's direction — firms with positive earnings surprises should be less risky post-announcement, yet they earn higher returns.
Out-of-Sample Evidence
Moderate OOS survivalPEAD has shown meaningful OOS survival since its first documentation, but the magnitude has declined. Regulatory changes (Reg FD in 2001, faster information dissemination) have compressed the window over which drift occurs. The signal works best at short horizons (1–3 months) and in smaller, less-covered stocks. In a highly efficient large-cap universe, the effect is nearly zero. This illustrates a general principle: anomalies that survive most robustly tend to be concentrated in segments where limits to arbitrage are highest.
Key Papers
Foundational research on this factor — start here.
An Empirical Evaluation of Accounting Income Numbers
Ball, R., & Brown, P.
1968
Journal of Accounting Research
Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?
Bernard, V. L., & Thomas, J. K.
1989
Journal of Accounting Research
Chan, L. K. C., Jegadeesh, N., & Lakonishok, J.
1996
Journal of Finance
Further Reading
A Tale of Two Anomalies: The Implications of Investor Attention for Price and Earnings Momentum
Hou, K., Xiong, W., & Peng, L.
2009
Working Paper