CBR Briefing #41

• Many businesses have higher earnings in one quarter of the year than in others. In retail, for example, Christmas sales consistently drive stronger fourth-quarter results. A seasonal high-earnings quarter occurs predictably at the same time each year; but research by Tom Y. Chang and David H. Solomon of the University of Southern California, Samuel M. Hartzmark of Chicago Booth, and Eugene F. Soltes of Harvard Business School suggests that markets aren’t pricing-in information from cyclical earnings.
• Investors often seem to be surprised when companies with seasonally strong quarters announce earnings for those quarters. According to the researchers, these companies tended to have high stock returns on the day earnings were announced and on the one or two days before and after the announcement (see chart). The returns were measured relative to companies with seasonally weak earnings in the same quarter.
• Earnings announcements are typically preceded by analyst estimates. And though analysts did adjust expectations upward for seasonality, they did not adjust enough, according to the researchers.
• Investors tend to focus more on recent data, the researchers argue. Low-performing recent quarters shape expectations, while higher performance from the same quarter of the previous year gets ignored. As a result, investors tend to be overly pessimistic when a seasonal peak comes around again.

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