Earnings Seasonality and Stock Returns Around Earnings Announcements

Summary

This study examines whether firms with predictable quarterly earnings patterns earn unusual stock returns when they announce earnings in their historically strong quarter. It measures seasonality mainly by ranking a firm’s earnings over five years and averaging the ranks for the same quarter. Portfolios with higher seasonal earnings ranks had stronger announcement-period returns, including after adjustment for common risk factors. Analyst forecast errors were also larger in positive seasonal quarters, consistent with investors and analysts underestimating those earnings.

The proposed explanation is that investors overweight recent earnings and underweight recurring seasonal patterns. The effect was stronger when recent quarters were weak, and it was concentrated around expected earnings announcements. The authors report checks against risk exposures, firm-specific delayed reactions, other return patterns, and accounting predictors; these did not account for the result. The evidence is based on historical U.S. data and does not establish that the pattern will persist or transfer to other markets. The article suggests seasonality as a factor research idea, while emphasizing that measuring and adjusting for it is not straightforward.

Key ideas

• The study ranks quarterly earnings over five years to identify each firm’s historically strong and weak quarters.
• Firms earned higher abnormal returns around announcements in their positive seasonal quarters.
• Analyst forecast errors were larger in positive seasonal quarters, supporting an underreaction interpretation.
• The effect strengthened after recent weak earnings and was concentrated around expected announcement periods.
• The results were not explained by the tested risk factors or several other known return predictors.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.