Accelerate your returns? An examination of Earnings Acceleration and a range of other earnings-related stock market anomalies - The Swedish Case
Abstract: In this study, we aim to explore whether an investor can use earnings acceleration (EA), defined as quarterly change in earnings growth, to construct a viable trading strategy that is able to separate future winners and future losers on the Swedish stock market. Using a sample from 2004 to 2016, we document that a trading strategy that goes long in top decile EA stocks and short in bottom decile EA stocks is unable to generate abnormal returns in both the month- and quarter-long windows. This is largely driven by an underperforming long portfolio which regardless of asset pricing model generates negative abnormal return, significant at least at the 5% level. However, we find that the EA strategy is positively associated with future market-adjusted returns in the 30-day horizon when controlling for a range of anomalies and risk factors. Also, we show that the EA strategy can be enhanced through combining it with other earnings anomalies, for example with profitability and earnings volatility (PROVOL), it generates a hedge return of 30.5% in the 360-day window. Moreover, we show that 4 out of 5 related earnings anomalies that have been documented in the U.S. namely gross profit, profit trend, earnings growth patterns and PROVOL are present on the Swedish market. Overall, we interpret these results as indications of market mispricing, which investors can exploit in a simple manner. Lastly, we test the performance of a revised EA strategy and show that it was highly successful in two sub-samples periods, indicating that EA provides value-relevant information.
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