1. Earnings Surprises vs Earnings Revisions Taco Bandito: Allen Born Mark Davidson Greg Dayko Stephanie Shayne Ed Shenkan

2. Overview n Comparison of Surprises to Revisions n Implementation n Results n Why it Works? n Caveats n Taco Test

3. Description of Strategy n Earnings Surprises: Accounting- Based Earnings Momentum Strategy that exploits market under-reactions to earnings surprises n Earnings Revisions: Accounting- Based Strategy that exploits market under-reactions to revisions in earnings estimates.

4. Implementation-Surprises n Created portfolios for the months March, June, September, December 1990-1999 –Compute the Surprise (% differential of Actual EPS to Expected EPS) –Long: top 5 % Surprisers –Short: bottom 5 % Surprisers n Equal weighting in longs and shorts n Held portfolios for 6 months

5. Implementation-Revisions n Created portfolios for the months March, June, September, December 1990-1999 –Compute the Revision (% Change in expected EPS) –Long: top 5 % Revisions –Short: bottom 5 % Revisions n Equal Weighting in Longs and Shorts n Held portfolios for 6 months

6. Results

7. Results

8. Why it works? n Prices of equities for companies recently announcing earnings surprises are mispriced n Investors under-react to changes in earnings –Mean reverting –Anchoring bias

9. Caveats n We used quarterly EPS estimates for revisions - Not annual EPS n Quarterly changes could be impacted by –Seasonality –Unusual circumstances/Extraordinary Earnings n We only included stocks which are presently in the S&P 500 (i.e. Yahoo instead of Laidlaw) n Used IBES returns

10. Taco Test n To eliminate seasonality, compared earnings forecast for same quarter of prior year

11. Questions & Answers