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When everyone misses on the same side: Debiased earnings surprises and stock returns

Chin-Han Chiang Wei Dai Jianqing Fan Harrison Hong Jun Tu

Statistics Theory and Methods mathscidoc:1912.43427

2015
In event studies of capital market efficiency, an earnings surprise has historically been measured by the consensus error, defined as earnings minus the consensus or average of professional forecasts. The rationale is that the consensus is an accurate measure of the markets expectation of earnings. But since forecasts can be biased due to conflicts of interest and some investors can see through these conflicts, this rationale is flawed and the consensus error a biased measure of an earnings surprise. We show that the fraction of forecasts that miss on the same side (FOM), by ignoring the size of the misses, is less sensitive to such bias and a better measure of an earnings surprise. As a result, FOM out-performs the consensus error and its related robust statistics in explaining stock price movements around and subsequent to the announcement date.
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@inproceedings{chin-han2015when,
  title={When everyone misses on the same side: Debiased earnings surprises and stock returns},
  author={Chin-Han Chiang, Wei Dai, Jianqing Fan, Harrison Hong, and Jun Tu},
  url={http://archive.ymsc.tsinghua.edu.cn/pacm_paperurl/20191221114346904297987},
  year={2015},
}
Chin-Han Chiang, Wei Dai, Jianqing Fan, Harrison Hong, and Jun Tu. When everyone misses on the same side: Debiased earnings surprises and stock returns. 2015. http://archive.ymsc.tsinghua.edu.cn/pacm_paperurl/20191221114346904297987.
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