Gross Profit Surprises and Future Stock Returns

• In Event: Financial Accounting & Reporting # 4
  In Paper Session: Financial Accounting and Reporting # 4

Abstract

We show that seasonally differenced gross profit surprises predict future stock returns incremental to returns predicted by standardized unexpected earnings (i.e., SUE) and other accounting-based variables with predictive power. Hedge portfolio strategies that exploit the predictive power of gross profit surprises generate significant positive returns in most calendar quarters spanning 1977-2010 with magnitudes comparable to SUE-based strategies. We also show that the incremental predictive power of revenue surprises documented in Livnat and Jegadeesh (2006) is subsumed by gross profit (i.e., revenues less cost of sales) surprises when returns are measured over three months beginning in the fiscal quarter subsequent to the surprise quarter.

Authors

• Tim D Haight, University of California, Irvine

• Peng-Chia Chiu, University of California, Irvine