Table V

Mean Returns and Characteristics for Portfolios Classified by Revision in Analyst Forecasts

At the beginning of every month from January 1977 to January 1993, all stocks are ranked by their moving average of the last six months revisions in mean I/B/E/S estimates of current fiscal-year earnings per share, relative to beginning-of-month stock price, and assigned to one of ten portfolios. The assignment uses breakpoints based on New York Stock Exchange (NYSE) issues only. All stocks are equally-weighted in a portfolio. The sample includes all NYSE, American Stock Exchange (AMEX), and Nasdaq domestic primary issues with coverage on the Center for Research in Security Prices (CRSP) and COMPUSTAT. Panel A reports the average past six-month return for each portfolio, and buy-and-hold returns over periods following portfolio formation (in the following six months and in the first, second, and third subsequent years). Panel В reports accounting characteristics for each portfolio: book value of common equity relative to market value, and cash flow (earnings plus depreciation) relative to market value. Panel С reports each portfolios most recent past and subsequent values of quarterly standardized unexpected earnings (the change in quarterly earnings per share from its value four quarters ago, divided by the standard deviation of unexpected earnings over the last eight quarters). Panel D reports abnormal returns around earnings announcement dates. Abnormal returns are relative to the equally-weighted market index and are cumulated from two days before the one day after the date of earnings announcement. In Panel E, averages of percentage revisions relative to the beginning-of-month stock price in monthly mean I/B/E/S estimates of current fiscal-year earnings per share are reported.

Panel D: Abnormal Return Around Earnings Announcements

Most recent -0.017 -0.010 -0.007 -0.004 -0.001 0.002 0.003 0.007 0.012 0.021 announcement

First announcement -0.006 -0.004 -0.002 -0.001 -0.001 0.000 0.002 0.003 0.005 0.009 after portfolio formation

Second announcement -0.002 0.000 0.000 0.000 -0.001 0.002 0.002 0.001 0.003 0.004 after portfolio formation

Table V-Continued

average than stocks with low past announcement return.9 In comparison, the returns on stocks with high and low past prior return, but similar levels of announcement return, differ on average by 4.6 percent. Using measures of longer-term earnings news, as given by either standardized unexpected earnings or revisions in consensus estimates, turns out to place earnings momentum on a more equal footing with price momentum. The six-month spreads induced by past SUE or past revision, conditional on prior return, are 4.3 percent and 3.8 percent, respectively. Sorting on past return, conditional on past earnings news, produces average spreads in six-month returns of 3.1 percent (Panel B) and 4.5 percent (Panel C). The bottom line is that although the ranking by prior return generally gives rise to larger differences in future returns, neither momentum strategy subsumes the other. Instead, they each exploit underreaction to different pieces of information.

As in the earlier tables, however, there are signs in Table VI that the component of superior performance associated with earnings surprise is more short-lived than the component associated with prior return. As shown in Panel A, ranking stocks by past announcement return, conditional on prior return generates average spreads in returns of 2.8 percent during the first six months and spreads of 3.8 percent in the first year. On the other hand, the sort by prior return, holding announcement return fixed, produces average spreads of 4.6 and 8.6 percent over six and twelve months, respectively. The corresponding average spreads in Panel В using sorts by SUE are 4.3 percent (3.8 percent) for six months (one year), and using sorts by prior return are 3.1 percent (7.0 percent). Similarly, sorts in Panel С using REV6 give spreads of 3.8 percent (3.5 percent) for six months (one year), while sorts by prior return give spreads of 4.5 percent (9.2 percent). Apparently, the component of prior

9 In each of the three categories of prior return, we take the difference in returns between portfolios 3 and 1 when stocks are ranked by prior announcement return. The reported number is the simple mean of the three differences.

Table VI

Postformation Returns and Earnings Surprises for Portfolios Ranked by 2-Way Classifications

In Panels A to C, at the beginning of every month from January 1977 to January 1993, all stocks are ranked by their compound return over the prior six months and assigned to one of three equal-sized portfolios. All stocks are also independently ranked by a measure of earnings surprise and assigned to one of three equally-sized portfolios. The assignments use breakpoints based on New York Stock Exchange (NYSE) issues only. The intersections of the sort by prior return and the sort by earnings surprise give three sets of nine portfolios each. All stocks are equally-weighted in a portfolio. The sample includes all NYSE, American Stock Exchange (AMEX), and Nasdaq domestic primary issues with coverage on Center for Research in Security Prices (CRSP) and COMPUSTAT. In Panel A, earnings surprise is measured as the abnormal return relative to the equally-weighted market index, cumulated from two days before to one day after the date of the most recent past earnings announcement. In Panel B, earnings surprise is measured as the most recent past unexpected earnings (the change in quarterly earnings per share from its value four quarters ago) divided by the standard deviation of unexpected earnings over the last eight quarters. In Panel C, earnings surprise is a moving average of the past six months revisions in mean I/B/E/S estimates of current fiscal-year earnings per share, relative to the beginning-of-month stock price. In Panels D and E, the independent rankings are by revisions in analyst forecasts and by either past standardized unexpected earnings or by abnormal return around past earnings announcement. For each portfolio, the table shows the average buy-and-hold returns for the first six months and the first through third years following portfolio formation. Means are also given for the cumulative abnormal return around the first four announcements of quarterly earnings after portfolio formation, the first four quarterly standardized unexpected earnings after portfolio formation, and percentage revisions relative to the beginning-of-month stock price in monthly mean I/B/E/S estimates of current fiscal-year earnings per share.

Panel A: Abnormal Return Around Earnings Announcement and Prior 6-Month Return