earnings growth is not particularly important for the purpose of measuring
unexpected earnings to predict returns.
Table 10.10 summarizes the returns on portfolios formed based on
SUE. Latane and Jones examine the profitability of SUE strategies over
the 1974 to 1977 sample period and find that the difference in returns
between the extreme SUE portfolios is about 7.3 percent over a six-month
period. The extreme portfolios in Latane and Jones comprise stocks with
SUE greater than 2 for the high SUE portfolio and less than −2 for the low
SUE portfolio. With this classification, roughly 15 percent of the stocks in
the sample are allocated to each extreme portfolio. Bernard and Thomas
(1989) report similar levels of return differences across the extreme SUE
deciles for the small and medium firms. For the large firms, the return dif-
ference between the extreme decile portfolios is 4.1 percent.
Chan et al. (1996) find a six-month return difference of 7.5 percent be-
tween the extreme SUE portfolios over the 1973 to 1993 sample period.
The return difference over a twelve-month holding period is 7.5 percent,
MOMENTUM 379Table 10.10
Returns for Portfolios Formed Based on Standardized Unexpected Earnings (SUE).This table presents the returns of extreme SUE portfolios reported in various pa-
pers. SUE is defined as.
The High and Low SUE portfolios in Latane and Jones (1969) are comprise stocks
with SUE greater than 2 and less than −2 respectively. The High and Low SUE port-
folios in Bernard and Thomas (1989) and Chan, Jegadeesh, and Lakonishok (1996)
comprise the decile of stocks with the highest and lowest SUE respectively. Latane
and Jones, and Bernard and Thomas report abnormal returns and Chan et al. report
raw returns.
Sample Holding
ReturnsPaper Period Period Sample High SUE Low SUE Difference
Latane and 1974– 6 months All Firms 3.1 −4.2 7.3
Jones (1979) 1977
Bernard and 1974– 120 days Small 2.6 −5.4 8.0
Thomas 1986 Medium 2.3 −4.8 7.1
(1989) Large 2.0 −2.1 4.1
Chan 1973– 6 months All Firms 11.9 5.1 6.8
Jegadeesh and 1993
Lakonishok 12 months All Firms 21.3 13.8 7.5
(1996)
SUEQuarterly earnings Expected quarterly earnings
Standard deviation of quarterly earnings=.−