Earnings Surprises and Stock Returns: Some Evidence from Asia/Pacific and Europe by H. Christine Hsu

H. Christine Hsu CHSU@csuchico.edu is a Professor of Finance in the Department of Finance and Marketing, College of Business, California State University, Chico.
The study reported on in this article suggests that the semistrong form market efficiency appears to be violated in the Asia/Pacific equity market. The findings of this study reveal that the superior (inferior) performance of portfolios is associated with positive (negative) earnings surprises, and that portfolio returns increase with earnings surprises over the years of 19951999 in this international equity market. Regression results suggest that the earnings surprises are much more powerful in predicting portfolio returns than they are in predicting stock returns. The author concludes from the study that portfolio earnings surprises information is useful in predicting oneyear ahead portfolio returns and that a trading strategy based on earnings surprises earns abnormally high returns year after year. Needless to say, this study has significant implications for investors / portfolio managers in making their asset allocation decisions in Asia/Pacific equity market. 
If markets are efficient in semistrong form as defined in Fama (1970), then stock prices will adjust immediately to public information such as the release of street consensus earnings estimates and the announcement of actual earnings. As a result, a trading strategy based on publicly available earnings information cannot be profitable. Evidence from recent studies suggests market inefficiency in semistrong form. For example, Charitou and Panagiotides (1999) find that an earningsbased trading strategy earns higher excess returns than a cash flowbased trading strategy in the U.K.; Bagoli, Beneish and Watts (1999) conclude that trading strategies based in the relation between Whisper and First Call earnings forecasts earn abnormal stock returns; Alexander and Ang (1998) demonstrate that the U.S. equity markets do respond to earnings paths; Cheung, Chung and Kim (1997) show that trading strategies based on earnings to price ratio of a sample of Hong Kong firms yield significant excess returns for various holding periods up to two years; and Bernard and Thomas (1990) find that part of the stock price response to this quarter's earnings announcement is predictable from earnings one to four quarters back. The objectives of this study are to add one more piece of evidence to support the hypothesis of semistrong form market inefficiency and to investigate whether earnings surprises can be used to create a profitable trading strategy that captures stocks with superior performance.
DATA AND METHODOLOGY
Earnings expectations data on more than 18,000 international stocks from 1987 through 2000 are available in Institutional Brokers Estimate Systems (I/B/E/S) historical summary database. [1] Since data on many firms in the emerging markets became available in 1993 or later, my sample period runs from 1994:12 through 1999:12. The universe of firms is composed of international firms in 40 countries from Asia/Pacific and Europe. To be included in the sample, the common stock of an international firm must have common shares outstanding (at least one billion shares), price (at least $5) [2] actual earnings per share, consensus earnings per share estimate, and standard deviation of earnings estimates data in December of year t, and dividend and stock price data in December of year t+1. I define consensus earnings per share estimate as the mean forecasted earnings per share when there are at least three financial analysts contributing to I/B/E/S estimates. The minimum common shares outstanding and price screening standards are employed to ensure that only firms with big market capitalization (= price x common shares outstanding) are included in the analysis. I use the standardized unexpected earnings (SUE) to measure the earnings surprises. It is defined as
SUE_{t} = (A_{t}  F_{t}) / SD_{t}
Where SUE_{t} = year t standardized unexpected earnings
A_{t} = year t actual earnings per share reported by the firm
F_{t} = year t consensus earnings per share forecasted by analysts in year t1
SD_{t} = year t standard deviation of earnings estimates
SUE measures the deviation of actual earnings from the mean forecasted earnings scaled by its standard deviation. If financial analysts overforecast, then there is negative earnings surprise (SUE <0), and vice versa. The absolute value of SUE is a direct indicator of the degree of the earnings surprises (or the forecasting errors). To examine the relation between the earnings surprise and stock performance, I rank the stocks in terms of SUE at the end of each year t, and compute their rates of return in year t+1. The rate of return is calculated as the sum of the stock's dividend yield and capital gains yield,
R_{t+1} = [DIV_{t+1} / P_{t} ]+ [(P_{t+1} P_{t}) / P_{t} ]
Where R_{t+1} = year t+1 rate of return
DIV_{t+1} = year t+1 dividends on common stock
P_{t+1} = year t+1 price of stock
P_{t} = year t price of stock
To eliminate outliers in the analysis, I exclude five percent of the stocks with the highest SUE and five percent of the stocks with the lowest SUE from the sample. This yields 11,258 stockyear observations during the sample period, where 243 observations have no earnings surprises (SUE = 0). Since the focus is on the association of earnings surprises with stock returns, these zero SUE observations are excluded from the sample. This results in 11,015 stockyear observations for the study, 2021 observations from Asia/Pacific equity market, and 8994 observations from Europe equity market.
To investigate whether stock behavior is affected differently by the direction of earnings surprises, I then group the stocks into two portfolios based on the sign of SUE. Portfolio A consists of the stocks with positive earnings surprises (SUE > 0), and Portfolio B with negative earnings surprises (SUE < 0). Table 1 contains the descriptive statistics of common shares outstanding, SUE and portfolio returns of the base sample over the study period. Table 2 contains the descriptive statistics of the base sample by year. Table 3 summarizes the difference between the two portfolios’ mean returns by year.
To evaluate how the earnings surprise in year t (SUE_{t}) is associated with the stock return in year t+1 (R_{t+1}) statistically, I run the following regression in each market for the stocks in each of the two portfolios, namely, Portfolios A and B.
R_{t+1 }= a + b SUE_{t }+ e
Where a = the intercept of the regression line
b = the sensitivity of stock return to SUE
e = stock return movement that is uncorrelated to SUE
If the earnings surprises coefficient b is significantly different from zero, then the association between SUE and the stock return is not due to chance. If coefficient b is positive (negative), then there is a direct (inverse) relation between SUE and stock return. Table 4 summarizes the regression results for the stocks in each of the two portfolios (Portfolios A and B) by market.
To examine how positive earnings surprises affect portfolio performance in Asia/Pacific market, I assign stocks in Portfolio A into one of the twenty subgroups (Asia/Pacific Portfolios A1A20) on the basis of their SUE annually. That is, at the end of each year from 1994 through 1998 in Asia/Pacific market, five percent of the stocks with the highest SUE are assigned to Asia/Pacific Portfolio A1, five percent of the stocks with the next highest SUE are assigned to Asia/Pacific Portfolio A2, and so on. Table 5 contains the descriptive statistics of the twenty portfolios with positive earnings surprises in Asia/Pacific market. The same grouping procedure is employed for the stocks with negative SUE in Asia/Pacific market. Table 6 contain the descriptive statistics of the twenty portfolios with negative earnings surprises in Asia/Pacific market (Asia/Pacific Portfolios B1B20).^{ }Portfolio B1 consists of five percent of the stocks with the lowest negative earnings surprises and Portfolio B20 consists of 5% of the stocks with the highest negative earnings surprises. To examine how earnings surprises affect portfolio returns in Europe market, I adopt the same grouping procedures and constructed twenty portfolios with positive SUE (Europe Portfolios A1A20) and twenty portfolios with negative SUE (Europe Portfolios B1B20). [3]
To investigate whether the relationship between portfolio performance in year t+1 and portfolio earnings surprises in year t is statistically significant, I finally regress the portfolio return against the portfolio SUE for Portfolios A1A20 and Portfolios B1B20 in each market. Table 7 provides the regression results for the portfolios by market.
RESULTS AND IMPLICATIONS
Table 1 shows there were 4,522 observations with positive earnings surprises (or underforecast errors) and 6,493 with negative surprises (or overforecast errors) during the 19941998 sample period in the international equity markets. (Click here to go to the tables.) It appears that financial analysts were not very accurate in forecasting earnings and that they tend to overforecast more often than to underforecast earnings of stocks over the five years ending in December 1998. This is found not only in Asia/Pacific market but in the European market as well. Table 2 confirms the analysts' tendency to overforecast earnings in all five years (19941998) covered in this study. The evidence of overforecasting is the strongest in 1998, during which there were 1,522 stocks with negative earnings surprises and only 591 stocks with positive earnings surprises in the markets. This evidence supports the findings from prior studies that analysts are inefficient in predicting earnings per share and that they tend to overforecast earnings of the stocks (Butler and Lang (1991), Brous and Kini (1993), Kang, O'Brien and Sivaramakrishnan (1994), Dreman and Berry (1995), Olsen (1996), Hunton and McEwen (1997), Chopra (1998), and Easterwood and Nutt (1999)). This upward biased earnings estimation may be attributable to economic incentives to promote the purchase of the stocks as a result of the fact that the analysts are employed by brokerage or investment banking firms (Brown (1993), Dugar and Nathan (1995), Carleton, Chen and Steiner (1998), Lin and McNichols (1998), and Hayes (1998)). Or it may be attributable to the pressure to present favorable earnings forecasts because the analysts need to maintain, if not enhance, access to the firms they follow (Schipper (1991), Pratt (1993), Francis and Philbrick (1993), Clayman and Schwartz (1994), and Das, Levine and Sivaramakrishnan (1998)).
Table 1 also shows that on an annual basis, Portfolio A outperformed Portfolio B in terms of mean return (75.4% vs. 39.7%) and median return (13.4% vs. –3.7%) over the five years, 1995 through 1999 inclusive. (Click here to go to the tables.) One might wonder if Portfolio A's excess return is due to risk. The answer is no. In fact, Portfolio A's variability in return (standard deviation) is lower than that of Portfolio B (1.578 vs. 1.648). Table 1 suggests that the portfolio with positive earnings surprises (Portfolio A) had higher return and lower risk as compared to the portfolio with negative earnings surprises (Portfolio B) in both the Asia/Pacific and Europe markets. It appears that the positive (negative) earnings surprise is good (bad) news to investors/portfolio managers in these international equity markets.
If the markets are efficient in semistrong form, then the abnormal returns of Portfolio A should disappear immediately after the earnings surprises information is factored in stock prices, and a SUE based trading strategy cannot be profitable year after year. Table 2 suggests otherwise; the portfolios with positive earnings surprises outperformed those with negative earnings surprises in every single year from 1995 to 1999 in the international equity markets. (Click here to go to the tables.) The results are graphed in Figures 1, 2 and 3, where the mean returns of the stocks in Portfolios A and B are plotted annually in each market. (Click here to go to the figures.) The implication is that arbitrage profits could have been captured if investors/portfolio managers short sold stocks with negative earnings surprises and bought stocks with positive earnings surprises in the international equity markets. That is, at the end of each year from 1994 through 1998, they borrowed shares of the stocks in Portfolio B and sold them; then used the proceeds to invest in the stocks in Portfolio A. They would have lost the return of Portfolio B on the short sales and gained the return of Portfolio A from the long positions over the fiveyear investment horizon. They could have pocketed an arbitrage return equal to the difference between the two portfolios’ returns in every single year from 1995 to 1999. This trading strategy based entirely on the sign of SUE turned out to be very profitable in Asia/Pacific market as well as in Europe market over the years of 1995 to 1999.
One might argue that the differences between the two portfolios' returns are not statistically significant. As summarized in Table 3, the difference between the two portfolios' mean returns is statistically significant in Asia/Pacific market every single year from 1995 to1999, and it is statistically significant in Europe market in four out of the five years study period. In fact, not only the profit from investing in Portfolio A didn't disappear over time, it became most significant in Asia/Pacific in 1997 and 1999. [4] Asia/Pacific Portfolio A returned a remarkable 81.7% (115.3%) to investors, while Asia/Pacific Portfolio B returned –17.2% (32.4%) in 1997 (1999). (Click here to go to the tables.)
So far the trading strategy is formed on the basis of the sign of SUE. An important question arises: Is there a relationship between the stock return and the size of earnings surprises? Table 4 shows that the coefficient of stock earnings surprises is positive, 0.7117 (0.0997), and significant at the .05 level for stocks in Asia/Pacific Portfolio A and at the .0001 level for stocks in Asia/Pacific Portfolio B, indicating that there is a direct relationship between stock return in year t+1 and its SUE in year t. However, the relationship is very weak, with Rsquare equal to .0077 (0.0167) for stocks in Portfolio A (Portfolio B). Table 4 also shows that the coefficient of stock earnings surprises is positive for stocks in Europe market, but it is not statistically significant.
The question now becomes: Is there a relationship between portfolio SUE and oneyear ahead portfolio returns? According to the regression results in Table 7, SUE in year t has a positive and statistically significant estimated association with the portfolio mean return in year t+1 only in Asia/Pacific market. This relationship is found not only in the portfolios with positive SUE, Asia/Pacific Portfolios A1A20, (coefficient b = .1633, tstatistics = 2.3456), but in the portfolios with negative SUE, Asia/Pacific Portfolios B1B20, (coefficient b = .1168, tstatistics = 4.5122). In other words, the portfolio return in year t+1 is an increasing function of its SUE in year t in Asia/Pacific market. That is, portfolio returns increase as SUE values increase, while portfolio returns decline as SUE values decrease. Furthermore, the regression performed for Asia/Pacific Portfolios A1B20 results in a Rsquare of .4786, indicating that portfolio SUE in year t contributes significantly towards an explanation of the variation in the portfolio return in year t+1. The results indicate that the use of portfolio SUE information allows better prediction of future portfolio returns than chance would have it in Asia/Pacific equity market. (Click here to go to the tables.)
An important implication is derived. Notice from Tables 5 and 6 that the portfolio with the highest SUE value (Asia/Pacific Portfolio A1) yielded an abnormally high mean return (131.8%), while the portfolio with the lowest SUE value (Asia/Pacific Portfolio B20) yielded an abnormally low mean return (51.6%). Recognizing the superior (inferior) performance of the portfolio with the highest positive (negative) earnings surprises, investors/portfolio managers could benefit from a oneyear holding period trading strategy. Specifically, if they were to reconstruct their portfolios at the end of each year from 1994 to1998 by buying the portfolio with the highest SUE (Asia/Pacific Portfolio A1) and short selling the portfolio with the lowest SUE (Asia/Pacific Portfolio B20), they would have earned an arbitrage return of 183.4% (= 131.8% + 51.6%) over the five years investment horizon.^{ }Even if short sale were not allowed in Asia/Pacific market, they could have gained a mean return of 131.8% by investing in Asia/Pacific Portfolio A1 alone.
CONCLUSIONS
This study suggests that the semistrong form market efficiency appears to be violated in Asia/Pacific equity market. The findings of this study reveal that the superior (inferior) performance of portfolios is associated with positive (negative) earnings surprises, and that the portfolio returns increase with SUE over the years of 19951999 in this international equity market. The regression results suggest that the earnings surprises are much more powerful in predicting portfolio returns than they are in predicting stock returns. Based on this study, I conclude that portfolio earnings surprises information is useful in predicting oneyear ahead portfolio returns, and that a SUEbased trading strategy earns abnormally high returns year after year. This study demonstrates that investors/portfolio managers could have gained arbitrage returns if they took a long position in the highest SUE portfolio and took a short position in the lowest SUE portfolio at the end of each year from 1994 to 1998. Needless to say, this study has significant implications for investors/portfolio managers in making their asset allocation decisions in Asia/Pacific equity market.
TABLE 1: Descriptive Statistics of Common Shares Outstanding, SUE
and Portfolio Return of the Base Sample, 19941998

#sh^{a} 
SUE_{t}_{ } 
R_{t+1}_{ } 
#sh 
SUE_{t} 
R_{t+1} 




Panel
I. Both Markets 


Portfolio
A 
Portfolio
B 

Mean 
741.3 
1.391 
0.754 
678.3 
2.525 
0.397 
Median 
43.4 
1 
0.134 
33 
1.355 
0.037 
Standard
Deviation 
3866 
1.269 
1.578 
3567.4 
3.262 
1.648 
Minimum 
1 
0.002 
1 
1 
21.333 
1 
Maximum 
69744.7 
6.786 
35.110 
73028.6 
0.002 
67.290 
Count 
4522 
4522 
4522 
6493 
6493 
6493 




Panel
II. Asia/Pacific Market 


Asia/Pacific
Portfolio A 
Asia/Pacific
Portfolio B 

Mean 
632.5 
1.402 
1.06 
557.3 
3.725 
0.198 
Median 
48.8 
0.989 
0.068 
37.1 
1.912 
0.243 
Standard
Deviation 
2750.2 
1.37 
1.162 
2802.3 
4.352 
1.295 
Minimum 
1 
0.002 
0.999 
1 
21.333 
1 
Maximum 
43595.7 
6.626 
35.031 
71294.5 
0.013 
62.421 
Count 
671 
671 
671 
1350 
1350 
1350 




Panel
III. Europe Market 


Europe
Portfolio A 
Europe
Portfolio B 

Mean 
760.3 
1.389 
0.701 
710.1 
2.21 
0.45 
Median 
42.4 
1 
0.142 
31.8 
1.248 
0 
Standard
Deviation 
4029 
1.25 
1.663 
3742 
2.826 
1.682 
Minimum 
1 
0.003 
1 
1 
21.065 
1 
Maximum 
69744.7 
6.786 
35.110 
73028.6 
0.002 
67.290 
Count 
3851 
3851 
3851 
5143 
5143 
5143 
^{a.}
# sh = common shares outstanding in billions of shares
TABLE 2: Descriptive Statistics of Base Sample by Year, 19941998

1994 
1994 
1995 
1995 
1995 
1996 
1996 
1996 
1997 
1997 
1997 
1998 
1998 
1998 
1999 

#sh 
SUE 
R 
#sh 
SUE 
R 
#sh 
SUE 
R 
#sh 
SUE 
R 
#sh 
SUE 
R 

Panel
I. Both Markets Portfolio A 


Mean 
565.3 
1.406 
0.549 
644 
1.302 
0.714 
937.6 
1.36 
0.748 
670.2 
1.496 
0.391 
1021.1 
1.364 
1.84 
Median 
40.1 
1.017 
0.024 
41.9 
0.965 
0.202 
42.4 
1 
0.245 
45.4 
1.059 
0.022 
50 
1 
0.393 
Standard
Deviation 
2971.9 
1.272 
1.528 
3598.9 
1.172 
1.475 
4918.9 
1.23 
1.252 
3405.2 
1.362 
1.079 
4499.2 
1.285 
2.612 
Minimum 
1 
0.007 
1 
1 
0.003 
0.998 
1 
0.01 
0.998 
1.5 
0.004 
0.998 
1 
0.002 
0.999 
Maximum 
55417.3 
6.226 
10.431 
49402.2 
6.053 
4.38 
69744.7 
5.851 
30.043 
56733.1 
6.625 
4.378 
63250.4 
6.786 
35.11 
Count 
926 
926 
926 
995 
995 
995 
888 
888 
888 
1122 
1122 
1122 
591 
591 
591 

Panel
II. Both Markets Portfolio B 

Mean 
433.2 
1.827 
0.001 
572.8 
1.621 
0.421 
670.6 
1.577 
0.179 
876.6 
2.207 
0.305 
812 
4.901 
0.886 
Median 
24.5 
1.208 
0.092 
31.6 
1.142 
0.065 
32 
1.058 
0.106 
42.2 
1.23 
0.069 
37.2 
2.865 
0.368 
Standard
Deviation 
2473.9 
1.812 
1.562 
3100.1 
1.586 
1.593 
3508.3 
1.505 
1.367 
4546.8 
2.558 
.847 
3826.5 
5.107 
2.773 
Minimum 
1 
9.154 
1 
1 
8.5 
1 
1 
7.154 
1 
1.5 
14.321 
1 
1 
21.333 
1 
Maximum 
46703.8 
0.01 
5.793 
56172.1 
0.005 
8.264 
65534.1 
0.002 
14.162 
71761.9 
0.01 
4.727 
73028.6 
0.013 
67.29 
Count 
1087 
1087 
1087 
1578 
1578 
1578 
1106 
1106 
1106 
1200 
1200 
1200 
1522 
1522 
1522 

Panel
III. Asia/Pacific Portfolio A 

Mean 
195.7 
1.48 
0.158 
276.9 
1.444 
0.169 
394.9 
1.61 
0.817 
592 
1.508 
0.078 
853.1 
1.3156 
1.153 
Median 
27.3 
1.018 
0.119 
39.1 
0.851 
0.052 
74.5 
1.303 
0.41 
97.1 
1.014 
0.115 
50 
0.9587 
0.34 
Standard
Deviation 
397.1 
.773 
.654 
740.8 
.767 
.509 
826.2 
1.422 
1.217 
1603.2 
1.514 
.692 
3565.5 
1.2914 
2.721 
Minimum 
1 
0.04 
0.998 
1 
0.035 
0.994 
2.3 
0.014 
0.88 
3.1 
0.02 
0.997 
1.1 
0.0016 
0.999 
Maximum 
2864.8 
6.226 
7.598 
5323.8 
5.597 
4.38 
5371.9 
5.368 
27.92 
11989.8 
6.071 
1.096 
43595.7 
6.626 
35.031 
Count 
84 
84 
84 
70 
70 
70 
78 
78 
78 
64 
64 
64 
375 
375 
375 

Panel
IV. Asia/Pacific Portfolio B 

Mean 
119.2 
1.777 
0.175 
116.6 
1.669 
0.02 
182.6 
1.737 
0.172 
496.4 
3.415 
0.203 
736.8 
4.588 
0.324 
Median 
20.7 
1.221 
0.23 
19.2 
1.28 
0.231 
33.7 
1.16 
0.474 
41.5 
2.507 
0.017 
45 
2.444 
0.277 
Standard
Deviation 
448.6 
1.771 
.773 
380.7 
1.502 
.767 
529.1 
1.655 
1.122 
1234.4 
3.095 
.551 
3436.2 
4.959 
2.859 
Minimum 
1.1 
8.714 
0.999 
1 
7 
0.995 
1.2 
7.081 
0.985 
2.2 
14.321 
0.999 
1 
21.333 
1 
Maximum 
3993.6 
0.059 
4.802 
4016.8 
0.033 
7.123 
3894.6 
0.021 
13.426 
8694.6 
0.049 
1.712 
71294.5 
0.013 
62.421 
Count 
104 
104 
104 
133 
133 
133 
117 
117 
117 
128 
128 
128 
868 
868 
868 

Panel
V. Europe Portfolio A 

Mean 
602.2 
1.399 
0.588 
671.8 
1.291 
0.755 
989.8 
1.336 
0.5 
674.9 
1.496 
0.42 
1312.8 
1.449 
3.033 
Median 
41.9 
1.017 
0.037 
42 
0.978 
0.212 
40.9 
1 
0.274 
43.4 
1.059 
0.03 
50.2 
1.124 
0.579 
Standard
Deviation 
3111.9 
1.253 
1.634 
3725.8 
1.15 
1.487 
5141.3 
1.202 
1.361 
3484.8 
1.353 
1.094 
5770.8 
1.273 
2.476 
Minimum 
1 
0.007 
1 
1 
0.003 
0.998 
1 
0.01 
0.998 
1.5 
0.004 
0.998 
1 
0.013 
0.999 
Maximum 
55417.3 
6 
10.431 
49402.2 
6.053 
3.128 
69744.7 
5.851 
30.043 
56733.1 
6.625 
4.378 
63250.4 
6.786 
35.11 
Count 
842 
842 
842 
925 
925 
925 
810 
810 
810 
1058 
1058 
1058 
216 
216 
216 

Panel
VI. Europe Portfolio B 

Mean 
466.4 
1.833 
0.02 
614.7 
1.617 
0.462 
728.4 
1.558 
0.221 
921.3 
2.062 
0.344 
911.8 
5.318 
1.631 
Median 
24.8 
1.208 
0.078 
33.4 
1.132 
0.091 
31.7 
1.034 
0.151 
42.4 
1.169 
0.079 
26.9 
3.407 
0.454 
Standard
Deviation 
2595.3 
1.817 
1.673 
3234.4 
1.594 
1.629 
3701.5 
1.486 
1.453 
4787.8 
2.448 
.951 
4290.8 
5.272 
2.537 
Minimum 
1 
9.154 
1 
1 
8.5 
1 
1 
7.154 
1 
1.5 
14.263 
1 
1 
21.065 
1 
Maximum 
46703.8 
0.01 
5.793 
56172.1 
0.005 
8.264 
65534.1 
0.002 
14.162 
71761.9 
0.01 
4.727 
73028.6 
0.016 
67.29 
Count 
983 
983 
983 
1445 
1445 
1445 
989 
989 
989 
1073 
1073 
1073 
654 
654 
654 
TABLE 3: Mean Returns of Stocks in Portfolio A vs. Mean Returns of Stocks
in Portfolio B by Year, 19951999

1995 
1996 
1997 
1998 
1999 







Panel
I. Both Markets 

Mean Return
of Stocks in A 
0.549 
0.714 
0.748 
0.391 
1.840 
Mean Return
of Stocks in B 
0.001 
0.421 
0.179 
0.305 
0.886 
Mean Return
Difference 
0.548 
0.293 
0.569 
0.086 
0.954 
tStatistics 
7.938^{**** } 
4.756^{****} 
9.681^{****} 
2.127^{*} 
7.405^{****} 







Panel
II. Asia/Pacific Market 

Mean Return
of Stocks in A 
0.158 
0.169 
0.817 
0.078 
1.153 
Mean Return
of Stocks in B 
0.175 
0.020 
0.172 
0.203 
0.324 
Mean Return
Difference 
0.333 
0.189 
0.989 
0.281 
0.829 
tStatistics 
3.199^{**} 
2.097^{*} 
5.734^{****} 
2.831^{**} 
4.855^{****} 







Panel
III. Europe Market 

Mean Return
of Stocks in A 
0.588 
0.755 
0.500 
0.420 
3.033 
Mean Return
of Stocks in B 
0.020 
0.462 
0.221 
0.344 
1.631 
Mean Return
Difference 
0.568 
0.293 
0.279 
0.076 
1.402 
tStatistics 
7.322^{****} 
4.507^{****} 
4.196^{****} 
1.711 
7.171^{****} 
* Significant at .05
level
**Significant at
.005 level
***Significant at
.001 level
****Significant at
.0001 level
TABLE 4: Regression of Stock Returns on Stock Earnings Surprises, 19941999

Coefficients 
Standard
Error 
tStatistics 
PValue 
RSquare 
Observations 








Panel
I. Both Markets Portfolio A 

Intercept 
0.5432 
0.1937 
2.8036 
0.0051 


SUE 
0.1515 
0.1029 
1.4722 
0.1410 
0.0005 
4522 








Panel
II. Both Markets Portfolio B 

Intercept 
0.6200 
0.1176 
5.2728 
0.0000 


SUE 
0.0882^{**} 
0.0285 
3.0952 
0.0020 
0.0015 
6493 








Panel
III. Asia/Pacific Portfolio A 

Intercept 
0.0622 
0.6127 
0.1016 
0.9191 


SUE 
0.7117^{*} 
0.3126 
2.2763 
0.0231 
0.0077 
671 








Panel
IV. Asia/Pacific Portfolio B 

Intercept 
0.5690 
0.1195 
4.7608 
0.0000 


SUE 
0.0997^{****} 
0.0209 
4.7789 
0.0000 
0.0167 
1350 








Panel
V. Europe Portfolio A 

Intercept 
0.6533 
0.2001 
3.2655 
0.0011 


SUE 
0.0340 
0.1070 
0.3175 
0.7509 
0.0000 
3851 








Panel
VI. Europe Portfolio B 

Intercept 
0.6184 
0.1459 
4.2384 
0.0000 


SUE 
0.0764 
0.0407 
1.8784 
0.0604 
0.0007 
5143 
* Significant at .05
level
**Significant at
.005 level
****Significant at
.0001 level
TABLE 5: Descriptive Statistics of SUE and Return for Asia/Pacific Portfolios A1A20, 19941998

SUE_{t} 
R_{t+1} 
SUE_{t} 
R_{t+1} 
SUE_{t} 
R_{t+1} 
SUE_{t} 
R_{t+1} 
SUE_{t} 
R_{t+1} 












Panel
I. Asia/Pacific Portfolios A1A5 


Portfolio
A1 
Portfolio
A2 
Portfolio
A3 
Portfolio
A4 
Portfolio
A5 

Mean 
5.239 
1.318 
3.950 
0.904 
3.122 
0.331 
2.516 
1.841 
2.015 
0.539 
Median 
5.311 
0.292 
4.066 
0.294 
3.109 
0.095 
2.412 
0.392 
1.887 
0.055 
Standard
Deviation 
0.556 
0.830 
0.450 
0.851 
0.396 
1.111 
0.435 
1.890 
0.320 
1.683 
Minimum 
4.200 
0.960 
3.238 
0.972 
2.553 
0.977 
1.918 
0.997 
1.717 
0.997 
Maximum 
6.626 
28.008 
4.863 
27.921 
3.897 
4.934 
3.248 
35.031 
2.957 
14.550 
Count 
34 
34 
33 
33 
34 
34 
33 
33 
34 
34 












Panel
II. Asia/Pacific Portfolios A6A10 


Portfolio
A6 
Portfolio
A7 
Portfolio
A8 
Portfolio
A9 
Portfolio
A10 

Mean 
1.708 
0.678 
1.520 
0.998 
1.339 
0.558 
1.187 
0.681 
1.052 
0.316 
Median 
1.676 
0.067 
1.453 
0.197 
1.256 
0.124 
1.119 
0.296 
1.009 
0.091 
Standard
Deviation 
0.149 
1.784 
0.183 
1.121 
0.176 
1.316 
0.164 
0.953 
0.130 
0.834 
Minimum 
1.494 
0.879 
1.282 
0.964 
1.147 
0.990 
0.935 
0.995 
0.870 
0.829 
Maximum 
2.175 
7.027 
1.901 
17.271 
1.771 
10.421 
1.545 
11.104 
1.389 
3.429 
Count 
33 
33 
34 
34 
33 
33 
34 
34 
33 
33 












Panel
III. Asia/Pacific Portfolios A11A15 


Portfolio
A11 
Portfolio
A12 
Portfolio
A13 
Portfolio
A14 
Portfolio
A15 

Mean 
0.928 
0.896 
0.808 
0.039 
0.686 
1.387 
0.573 
0.244 
0.448 
0.829 
Median 
0.927 
0.212 
0.768 
0.080 
0.659 
0.081 
0.545 
0.001 
0.432 
0.055 
Standard
Deviation 
0.112 
1.855 
0.105 
0.665 
0.100 
1.641 
0.100 
1.167 
0.070 
1.403 
Minimum 
0.743 
0.994 
0.683 
0.999 
0.576 
0.974 
0.478 
0.994 
0.368 
0.999 
Maximum 
1.250 
15.771 
1.010 
1.567 
0.947 
18.167 
0.866 
5.000 
0.634 
17.598 
Count 
34 
34 
33 
33 
34 
34 
33 
33 
34 
34 












Panel
IV. Asia/Pacific Portfolios A16A20 


Portfolio
A16 
Portfolio
A17 
Portfolio
A18 
Portfolio
A19 
Portfolio
A20 

Mean 
0.338 
0.217 
0.261 
0.453 
0.184 
0.525 
0.111 
0.231 
0.047 
0.272 
Median 
0.320 
0.009 
0.237 
0.084 
0.164 
0.022 
0.109 
0.072 
0.042 
0.022 
Standard
Deviation 
0.071 
1.055 
0.061 
1.746 
0.058 
1.325 
0.033 
1.271 
0.028 
1.076 
Minimum 
0.256 
0.998 
0.189 
0.955 
0.100 
0.845 
0.038 
0.997 
0.002 
0.838 
Maximum 
0.531 
4.333 
0.417 
9.691 
0.353 
5.155 
0.191 
6.797 
0.114 
4.692 
Count 
33 
33 
34 
34 
33 
33 
33 
33 
35 
35 
TABLE 6: Descriptive Statistics of SUE and Return for Asia/Pacific Portfolios B1B20, 19941998

SUE_{t} 
R_{t+1} 
SUE_{t} 
R_{t+1} 
SUE_{t} 
R_{t+1} 
SUE_{t} 
R_{t+1} 
SUE_{t} 
R_{t+1} 












Panel
I. Asia/Pacific Portfolios B1B5 


Portfolio
B1 
Portfolio
B2 
Portfolio
B3 
Portfolio
B4 
Portfolio
B5 

Mean 
0.101 
0.304 
0.271 
0.555 
0.416 
0.820 
0.592 
0.554 
0.764 
0.940 
Median 
0.091 
0.047 
0.262 
0.019 
0.413 
0.071 
0.573 
0.189 
0.791 
0.067 
Standard
Deviation 
0.078 
1.508 
0.108 
1.646 
0.106 
1.143 
0.129 
1.404 
0.157 
1.394 
Minimum 
0.403 
0.993 
0.578 
1.000 
0.703 
0.999 
0.955 
1.000 
1.062 
0.990 
Maximum 
0.013 
10.944 
0.061 
9.227 
0.143 
49.855 
0.298 
7.016 
0.438 
19.426 
Count 
67 
67 
68 
68 
67 
67 
68 
68 
67 
67 












Panel
II. Asia/Pacific Portfolios B6B10 


Portfolio
B6 
Portfolio
B7 
Portfolio
B8 
Portfolio
B9 
Portfolio
B10 

Mean 
0.950 
0.992 
1.157 
0.232 
1.406 
1.415 
1.652 
1.377 
1.965 
0.409 
Median 
1.000 
0.008 
1.230 
0.037 
1.515 
0.054 
1.847 
0.152 
2.140 
0.059 
Standard
Deviation 
0.224 
1.068 
0.289 
1.695 
0.353 
1.111 
0.409 
1.204 
0.491 
1.086 
Minimum 
1.448 
0.995 
1.725 
0.999 
1.951 
0.997 
2.288 
1.000 
2.513 
1.000 
Maximum 
0.553 
26.670 
0.667 
12.241 
0.768 
56.755 
0.842 
62.421 
1.038 
14.712 
Count 
68 
68 
67 
67 
68 
68 
66 
66 
68 
68 












Panel
III. Asia/Pacific Portfolios B11B15 


Portfolio
B11 
Portfolio
B12 
Portfolio
B13 
Portfolio
B14 
Portfolio
B15 

Mean 
2.377 
0.078 
2.877 
0.063 
3.474 
0.310 
4.249 
0.412 
4.968 
0.427 
Median 
2.651 
0.297 
3.226 
0.315 
3.896 
0.549 
5.000 
0.461 
5.960 
0.589 
Standard
Deviation 
0.670 
1.023 
0.841 
1.169 
1.169 
0.825 
1.486 
0.573 
1.885 
0.570 
Minimum 
3.083 
1.000 
3.755 
1.000 
4.845 
1.000 
5.650 
1.000 
6.851 
1.000 
Maximum 
1.174 
3.880 
1.357 
4.403 
1.513 
2.880 
1.641 
1.612 
1.842 
1.905 
Count 
67 
67 
68 
68 
67 
67 
68 
68 
67 
67 












Panel
IV. Asia/Pacific Portfolios B16B20 


Portfolio
B16 
Portfolio
B17 
Portfolio
B18 
Portfolio
B19 
Portfolio
B20 

Mean 
6.034 
0.494 
7.136 
0.509 
8.844 
0.434 
10.592 
0.404 
14.613 
0.516 
Median 
7.101 
0.708 
8.662 
0.609 
10.343 
0.772 
12.857 
0.613 
17.105 
0.724 
Standard
Deviation 
2.239 
0.624 
2.796 
0.584 
3.350 
0.801 
4.571 
0.869 
5.492 
0.653 
Minimum 
8.254 
1.000 
9.800 
1.000 
12.344 
1.000 
15.634 
1.000 
21.333 
1.000 
Maximum 
2.005 
2.910 
2.330 
2.578 
2.713 
4.050 
3.249 
4.701 
5.000 
3.643 
Count 
68 
68 
67 
67 
68 
68 
67 
67 
68 
68 
TABLE 7: Regression of Portfolio Returns on Portfolio Earnings Surprises, 19941999

Coefficient 
Standard
Error 
tStatistics 
PValue 
RSquare 
Observations 








Panel
I. Asia/Pacific Portfolios A1A20 

Intercept 
.4301 
.1352 
3.1803 
.0052 


SUE 
.1633^{*} 
.0696 
2.3456 
.0307 
.2341 
20 








Panel
II. Asia/Pacific Portfolios B1B20 

Intercept 
.6321 
.1494 
4.2314 
0.0005 


SUE 
.1168^{***} 
.0279 
4.5122 
0.0006 
.4926 
20 








Panel III.
Asia/Pacific Portfolios A1B20


Intercept 
.5533 
.0734 
7.5341 
0.0000 


SUE 
0.1078^{****} 
0.0183 
5.9060 
0.0000 
.4786 
40 








Panel
IV. Europe Portfolios A1A20 

Intercept 
0.6381 
0.2235 
2.8545 
0.0105 


SUE 
0.0440 
0.1207 
0.3648 
0.7195 
0.0073 
20 








Panel
V. Europe Portfolios B1B20 

Intercept 
0.6374 
0.2038 
3.1275 
0.0058 


SUE 
0.0933 
0.0640 
1.4576 
0.1622 
0.1056 
20 








Panel
VI. Europe Portfolios A1B20 

Intercept 
0.5975 
0.1032 
5.7918 
0.0000 


SUE 
0.0785 
0.0396 
1.9813 
0.0548 
0.0936 
40 








Panel
VII. All Portfolios 

Intercept 
0.5752 
0.0631 
9.1128 
0.0000 


SUE 
0.0999^{****} 
0.0186 
5.3610 
0.0000 
02693 
80 
* Significant at .05
level
***Significant at
.001 level
****Significant at
.0001 level
FIGURE 1: Mean Returns of
Stocks in Both Markets Portfolio A vs. Mean Returns of Stocks in Both Markets
Portfolio B by Year, 19951999
FIGURE 2: Mean Returns of Stocks in Asia/Pacific Portfolio A
vs. Mean Returns of Stocks in Asia/Pacific Portfolio B by Year, 19951999
FIGURE 3: Mean Returns of Stocks in Europe Portfolio A vs. Mean Returns of Stocks in Europe Portfolio B by Year, 19951999
ENDNOTES
^{1} The author is grateful for the contribution of Institutional Brokers Estimate System, Inc. for providing the earnings expectations data used in this study.
^{2 }Foreign currencies are converted to U S dollars based upon the exchange rates as of December 16 in each year, 19941999, complied in I/B/E/S database.
^{3 }Descriptive Statistics of SUE and Return for Europe Portfolios A1A20 and B10B20 are available upon request.
^{4 }The portfolios returns were extremely low in 1998 due to the currency crisis in Asia/Pacific that year.
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