This paper shows that earnings announcements contain information about future returns of
“same-style” firms. In the time-series, these information transfers can be used to predict a large
number of style-based return spreads (e.g. the profitability of a value minus growth factor). In
the cross-section of stocks, a style-based earnings surprise strategy delivers an an equal-weighted
(value-weighted) long-short return of 184 (119) basis points per month. The results are neither
explained by industry membership, nor by differences in risk, and they are largely unrelated to
the performance of a traditional post earnings announcement drift (PEAD) strategy. Further
analyses show that investors and analysts underreact to the value-relevant information in earnings
announcements of “same-style” firms, suggesting gradual information diffusion as reason for the
return predictability.
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