Henry A. Latané

Empirical anomalies based on unexpected earnings and the importance of risk adjustments

Abstract The purpose of this paper is to reexamine Reinganums study which indicates that abnormal returns could not be earned unexpected quarterly earnings information, and to document precisely the response of stock prices to earnings announcements. This study, using a very large sample of stocks and daily returns, represents the most complete and detailed analysis of quarterly earnings reports that has been performed to date. Our results are contrary to those of Reinganum and show that abnormal returns could have been earned almost any time during the 1970s. Our analysis also indicates that risk adjustments matter little in this type of work. Finally, we find that roughly 50% of the adjustment of stock returns to unexpected quarterly earnings occurs over a 90-day period after the earnings are announced.

The geometric-mean principle revisited: A reply

Abstract As far as I know neither Samuelson nor Merton nor indeed Ophir has challenged the basic principle imbedded in the geometric-mean principle for long-run portfolio selection. If they or he wishes to adopt a significantly different policy and I follow the G policy, in the long run I become3almost certain to have more wealth than they. This hardly seems an erroneous or trivial proposition.

Earnings announcements: Pre- and -post responses

hy does there appear to be such a welldocumented lag in the adjustment of stock returns to earnings announcements? If the market is efficient, returns should quickly reflect information that is publicly available, including its unexpected component, so that no abnormal returns are achievable after earnings announcements. Does the market adjust returns substantially before the earnings announcement date for anticipated extreme earnings surprises, and, if so, by how much? Or does most of the adjustment follow the announcement? Support for the latter possibility would be particularly troublesome for the concept of market efficiency. The purpose of this article is to document precisely the cumulative movement of stock returns relative to the announcement date of quarterly earnings, separated by both the size and the sign ofl the unexpected earnings. We perform this separation, by using a two-way classification relating the unexpected earnings in any given quarter to the unexpected earnings in the preceding quarter. Such a classification provides more detail about the overall relationship between unexpected earnings and stock returns than would be possible using a one-way classification. Our tests employ a large sample of stocks and cover almost the entire decade of the 1970s, providing extensive documentation for the adjustment of stock

An Analysis of Common Stock Price Ratios

This paper is a quantitative analysis of annual price ratios of common stocks. The price ratio, Pt+l/Pt, is the ratio of price at the beginning of year t + 1 to price at the beginning of year t.0 Cross-section correlation coefficients between price ratios and other selected variables are derived for two samples of common stocks; these coefficients are then tested for stability over time. Finally the ability of the explanatory variables to discriminate between the best and poorest price performers is investigated. Table I shows the distribution of price ratios for a broad range of common stocks. The table was constructed from data taken from the New York Stock Exchange fact book and indicates the distribution of percentage price changes of all listed common stocks in years ended December 31, 1956 through December 31, 1963. As the table shows, the interquartile spread or difference between the percentage price change of the upper and lower quartile stocks was relatively large at about 30 percentage points and fairly stable over the years reported on. This consistent annual pattern of interquartile spreads is to be contrasted with the wide year-to-year variation in the median percentage price change, indicating there is a strong intercorrelation among stock price movements. In other words, most stock prices either move up together or down together in any particular year, but whichever is the case the percentage point difference between the typical large price change and the typical small price change remains about the same. Therefore if an investor can discrim-

The geometric mean criterion continued

Both the portfolio manager and the entrepreneur are faced with repeated non-diversifiable choices with cumulative effects. This note deals with the hierarchy of objectives, goals and criteria which must be used as guides in making such choices. An objective can be reached only in the future. It cannot be used as a basis for choosing among strategies with uncertain outcomes since what strategy will lead to achievement of the objective depends on future events. For example, consider the gambler who has the option to bet

Standard Deviations of Stock Price Ratios Implied in Option Prices

1 on the toss of a fair coin. In the event of heads he will have

FURTHER INSIGHT INTO THE STANDARDIZED UNEXPECTED EARNINGS ANOMALY: SIZE AND SERIAL CORRELATION EFFECTS

2 if he bets and

Standardized Unexpected Earnings—1971–77

1 if he does not bet. In the event of tails he will have 0 if he bets and

CRITERIA FOR PORTFOLIO BUILDING

1 if he does not bet. The mere fact that this gambler wishes to maximize his money on hand at the end of the toss (his objective) does not give him a rational basis for deciding whether or not to bet. Since the objective by itself cannot be used as the basis for choosing among strategies with uncertain outcomes a goal which can be reached at the time of making the choice is necessary. A goal is necessary whenever the outcome of the choice is uncertain, whether the maximand is expressed in terms of subjective utility or of an objective measure of value. The decision maker who adopts a goal does not forego his objective. He merely chooses the goal as the best available landmark on the road to his objective. They are landmarks which can surely be reached by the decision maker who is confronted with a filled-in matrix which shows the probability of each relevant future occurrence and all combined effects of strategies and future occurrences. It seems reasonable to assume that the wealth-holder wishes to maximize realized terminal wealth. This is equivalent to realized growth rate and also to realized terminal utility if we accept the premise that more wealth is preferred to less. These three equivalent objectives lead to three sets of goals and criteria to be maximized which are not equivalent: (1) expected value, (2) expected utility, and (3) expected growth rate. The wealth-holder who consistently maximizes expected valde will maxi