Earnings Surprises and the Options Market

Abstract

Numerous articles over the past few decades have documented a consistent relationship between earnings surprises and subsequent stock price performance. [See, for example, Ball and Brown (1968), Rendleman, Jones, and Latane (1982), Foster, Olsen, and Shevlin (1984), and Bernard and Thomas (1989).] Specifically when firms announce quarterly earnings figures that are higher (lower) than market expectations, as proxied by either mechanical time-series models or commercially available analysts’ forecasts, the stock price performance following the announcement tends to be abnormally good (bad). This phenomenon is referred to as post-earnings-announcement drift or the standardized unexpected earnings effect, SUE for short.