Forecastability of Earnings Surprises

Abstract
I investigate whether it is possible to profitably trade on predicted earnings surprises, forecasted using the Foster (1977) model. Unlike the extant literature, which documents a strong positive relation between actual earnings surprises and returns, I find that trading on predicted earnings surprises, generated by the Foster (1977) model, has earned a small negative, but statistically indistinguishable from zero, return. This result highlights the difficulty in forecasting earnings surprises.