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Earnings Surprise “Materiality” as Measured by Stock Returns
Author(s) -
Kinney William,
Burgstahler David,
Martin Roger
Publication year - 2002
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.t01-1-00055
Subject(s) - earnings surprise , surprise , earnings , econometrics , materiality (auditing) , stock (firearms) , economics , financial economics , post earnings announcement drift , monetary economics , earnings response coefficient , accounting , history , psychology , social psychology , archaeology , aesthetics , philosophy
Ranked earnings surprise portfolios formed from First Call files for 1992–97 are used to assess the annual earnings surprise magnitude for an individual firm sufficient to expect a “significant market reaction.” We find that, for an individual firm, the maximum probability of a gain from trading on prior knowledge of any surprise magnitude is .622. The lack of probable trading gains is due to the S–shaped surprise/return relation and the large variance of returns for a given magnitude of surprise. In turn, we find that the S–shape is related empirically to the dispersion of analyst forecasts. Thus, factors underlying dispersion differences are related to the importance or “materiality” of earnings surprise as measured by stock returns and explain at least part of the S–shaped surprise/return relation.