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{{Accounting}}
An '''earnings surprise''', or '''unexpected earnings''', in [[accounting]], is the difference between the [[Financial reporting|reported]] [[earnings]] and the expected earnings of an [[Accounting entity|entity]].<ref name="P 2010">{{cite book|last=Pinto|first=Jerald E.|title=Equity Asset Valuation|year=2010|publisher=John Wiley & Sons|isbn=047057965X|url=http://books.google.com/books?id=XCL9bkrOrpcC|edition=2nd|coauthors=Elaine Henry, Thomas R. Robinson, and John D. Stowe|accessdate=18 January 2014}}</ref> Measures of a firm's expected earnings, in turn, include analysts' forecasts of the firm's [[Profit (accounting)|profit]]<ref name = "investopedia">{{cite web |url=http://www.investopedia.com/terms/e/earningssurprise.asp |title=Earnings Surprise Definition |year=2013 |website=Investopedia |accessdate=12 January 2014}}</ref><ref name = "DP 2001">Defond, Mark L., and Chul W. Park. 2001. “The Reversal of Abnormal Accruals and the Market Valuation of Earnings Surprises.” ''The Accounting Review'' 76 (3): 375–404.</ref> and [[mathematical models]] of expected earnings based on the earnings of previous [[accounting period]]s.<ref name="BT 1990">{{cite journal|last=Bernard|first=Victor L.|coauthors=Jacob K. Thomas|title=Evidence that Stock Prices Do Not Fully Reflect that Implications of Current Earnings for Future Earnings|journal=Journal of Accounting and Economics|year=1990|volume=13|pages=305–340|url=http://www.sciencedirect.com/science/article/pii/016541019090008R|accessdate=18 January 2014}}</ref><ref name="SL 1999">{{cite journal|last=Soffer|first=Leonard C.|coauthors=Thomas Lys|title=Post-Earnings Announcement Drift and the Dissemination of Predictable Information|journal=The Accounting Review|year=1999|volume=16|issue=2|pages=305–331|url=http://onlinelibrary.wiley.com/doi/10.1111/j.1911-3846.1999.tb00583.x/abstract|accessdate=18 January 2014}}</ref>

==Effect of earnings surprises==

[[Stock markets]] tend to react in the same direction as earnings surprises—positively to positive earnings surprises and negatively to negative earnings surprises—although a significant proportion of earnings surprises result in stock markets reacting in the opposite direction, which may be due to other relevant information released with the earnings announcement or inaccurate measurement of the earnings surprise.<ref name="ZS 2012">{{cite web|last=Zhou|first=Ping|title=Option Strategies for Earnings Announcements: Opportunities and Risks|url=http://www.ftpress.com/articles/article.aspx?p=1960831&seqNum=4|work=FT Press|publisher=Pearson Education|accessdate=13 January 2014}}</ref>

The [[Capital market|market]], however, may not correctly estimate the implications of earnings surprises when it revises its expectations of future earnings, which will decrease the change in stock prices associated with the change in earnings. In fact, many studies in [[accounting research]] have documented that the market takes up to a year to adjust to earnings announcements, a phenomenon known as the [[post-earnings announcement drift]].<ref name="K 2001">{{cite journal|last=Kothari|first=S. P.|title=Capital markets research in accounting|url=http://web.mit.edu/kothari/www/attach/Capital%20markets%20review%20paper%20JAE%20journal%20version.pdf|journal=Journal of Accounting and Economics|year=2001|volume=31|pages=105–231|accessdate=18 January 2014}}</ref>

Large negative earnings surprises may have legal and [[reputation]]al costs to managers. Firstly, managers can be held personally [[Legal liability|liable]] if [[shareholders]] [[Lawsuit|sue]] the firm for failing to disclose negative earnings news promptly. Secondly, [[Money management|money managers]] may choose not to hold, and [[Financial analyst|analysts]] may choose not to follow, the stocks of firms whose managers have reputations for withholding bad news. This may contribute to managers' [[Voluntary disclosure|voluntarily disclosure]] of information related to negative earnings surprises: quarterly earnings announcements containing large negative earnings surprises are preempted by voluntary disclosures more frequently than are other earnings announcements.<ref name="S 1994">{{cite journal|last=Skinner|first=Douglas J.|title=Why Firms Voluntarily Disclose Bad News|journal=Journal of Accounting Research|year=1994|volume=32|issue=1|pages=38–60}}</ref>

== Measurement ==
Earnings surprises can be measured using historical earnings or analysts' forecasts.<ref name="CAIA 2012">{{cite book|last=Anson|first=Mark J. P.|title=CAIA Level I: An Introduction to Core Topics in Alternative Investments|year=2012|publisher=John Wiley & Sons|isbn=1118285654|url=http://books.google.com/books?id=ic75IjNy4mQC|edition=2nd|coauthors=Donald R. Chambers, Keith H. Black, Hossein Kazemi}}</ref>

In [[accounting research]], a measure that uses historical earnings is ''standardized unexpected earnings'' (SUE). SUE is the [[Standard score|standardized]] difference between reported earnings and expected earnings, where expected earnings is [[mathematical model|modelled]] based on the assumption that earnings follows a [[Seasonality|seasonal]] [[random walk]] with a [[Trend line (technical analysis)|trend]]. In other words, in the case of quarterly earnings the SUE for quarter t is
: <math> SUE_t = \frac{Q_t - E(Q_t)}{\sigma(Q_t - E(Q_t)} </math>
where σ(X) is the standard deviation of X, and the expected earnings, ''E(Q<sub>t</sub>)'', is calculated using prior reported earnings:
: <math> E(Q_t) = \delta + Q_{t-4} </math>
where ''Q<sub>t''-4</sub> is the reported earnings for quarter t-4 and δ is the average trend.<ref name = "BT 1990" />

An alternative measure of SUE that uses analysts' forecasts is
: <math> SUE = \frac{EPS - Forecast}{\sigma(EPS - Forecast)} </math>
where ''EPS'' is a firm's [[earnings per share]], and ''Forecast'' is analysts' consensus forecast of its earnings per share.<ref name = "CAIA 2012" />

== See also ==
*[[Profit warning]]
== References ==
{{reflist|2}}

[[Category:Accounting]]
[[Category:Accounting research]]