How to Generate Alpha with Earnings Date Revisions
Tue August 19, 2014
Written by: Barry L. Star
August 19. 2014
In his just released paper, "Time Will Tell: Information in the Timing of Scheduled Earnings News", author Eric So, professor at MIT’s Sloan School of Management, finds that a firm’s initiated earnings date revisions can be used to predict that firm’s earning news. Using Wall Street Horizon data as a primary source of the study, the author finds firms that advance their earnings dates performed better on average than those that delayed and did so by a significant margin. “Better” is defined as a greater earnings performance, higher returns and a greater Return on Assets when compared to their counterparts that delayed their announcements.
Can we then use this information to generate alpha? Yes. Professor So confirms that a change in earnings date does constitute low visible news because the market change was realized when the earnings were announced, not when a date revision was announced. I believe that this is because as deHaan, Shevlin and Thornock  found, 81.6% of firms change their announcement at least once in a 12 month period. If we break off a small segment of the firms that move their release date, to those who advance at least 5 trading days, it becomes far easier to watch for the low visible rumblings of the market.
Firms that advance their earnings reports more than 5 days make up a small but significant segment of the market, roughly 7% of observations that were studied by So. This is a small enough market segment that can easily be monitored using the right resources. The data suggests that this segment is in most investors’ blind spot as volatility doesn’t coalesce around the earning date revision and instead happens when the actual earnings data is announced. Once that earnings data is announced, So found that over 60% of the monthly event-time return happens within the next 3 trading days.
What does this mean for savvy investors? They can identify firms that advance their earnings by 5 or more trading days, jump on them early and ride the volatility. This is especially true for companies and industries that are highly sensitive to earnings. If their new announcement date happens to be on a Friday, an investor can expect an even bigger boost given as discussed in my prior blog post, Turning Bear Friday into Bull Friday.
Professor So finds firms that advance their earnings dates generated greater earnings performance, higher returns and a greater Return on Assets on average than those that delayed their announcements and did so by a significant margin. It is fascinating to see how traders can translate the information into generating alpha.
Do you agree with this post? We would love to hear from you.
Barry Star is the Managing Director of Wall Street Horizon, provider of accurate data on upcoming earnings calendar dates, dividends and other single-stock events through low-latency alerts and intra-day feeds for institutional traders and investors.
Author: Eric So, MIT Sloan School of Management