| Investors are very slow in reacting to current losses or profits because of behavioral bias effects. It is very profitable to capture gains following positive or negative earnings surprises in stocks at the earnings announcement date since the price move after the announcement is small relative to the full price move.
The investment universe consists of stocks in NYSE, AMEX and NASDAQ. The standardized unexpected earnings are calculated for all stocks as the actual earnings minus the expected earnings divided by the earnings standard deviation.
Stocks are then divided into deciles based on SUE. The investor goes long stocks with highest positive earnings surprise (top decile) and short stocks with the highest negative earnings surprise (bottom decile). |
