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ESTIMATES / SURPRISES
SUEQ4
Full Description

 

Standardized Unexpected (Earnings or Sales) for a given period is computed by dividing the unexpected results (Actual - Est) by the standard deviation of the estimates preceding the actual announcement:

SU = (Actual - Est) / SD 

When analysts disagree, the standard deviation of estimates is high, and the degree to which actual earnings are considered as unexpected (the SU measure) would be rather low. Conversely, the higher the consensus among analysts, the lower the consensus standard deviation, which results in a higher surprise for a given level of unexpected results.

Functions

EPSSUE(offset , type , constraint=0)
SalesSUS(offset , type , constraint=0)

Parameters  
offset period offset (most current is 0, previous is 1, etc)
type QTR or ANN
constraint Upper and lower bound. For Example a contraint of 5 would limit the value in the -5 to +5 range.

Factors

SUEQ1-4, SUEY1-4: Standardized Unexpected Earnings for period
SUSQ1-4, SUSY1-4: Standardized Unexpected Sales for period

NOTE: pre-defined factors are constrainged to values between -10 to +10

Empirical Evidence

As shown in Kaestner(2006)'s paper[1], Cumulative Abnormal Returns (CAR) for portfolios grouped by SUE decile scores are positively correlated with SUE. For example Table 3 in the paper shows an abnormal return of 4.31% 60 days after the announcement for Portfolio 1 made up of the top decile SUE values.


However, the relationship is more complex when previous results of SUE are taken into account. Investors extrapolate the information too far into the future such that a series of past similar surprises causes an overreaction phenomenon, which drives stock prices below their fundamental value after a series of negative surprises, and above their fundamental value after a series of positive surprises.

This effect is shown in Table 6 where the highest CAR(60) of 4.94% occurs for Portfolio 1 (the top SUE decile) that followed a negative surprise (row labelled “1,-”).

It also shows that the worst CAR(60) return of -1.97% for Portfolio 1 made up of stocks that had 4 prior positive surprises (row labelled "1,++++ "). In other words the effect of a positive surprise diminishes to the point of being inversely proportional the longer the positive trend continues.


References

1. Kaestner 2006, Anomalous Price Behavior Following Earnings Surprises: Does Representativeness Cause Overreaction?