EVIDENCE THAT STOCK-PRICES DO NOT FULLY REFLECT THE IMPLICATIONS OF CURRENT EARNINGS FOR FUTURE EARNINGS

Evidence presented here is consistent with a failure of stock prices to reflect fully the implications of current earnings for future earnings. Specifically, the three-day price reactions to announcements of earnings for quarters t + 1 through t + 4 are predictable, based on earnings of quarter t. Even more surprisingly, the signs and magnitudes of the three-day reactions are related to the autocorrelation structure of earnings, as if stock prices fail to reflect the extent to which each firm's earnings series differs from a seasonal random walk. © 1990.