Question

Define an earnings surprise and explain how the surprise can impact the value of a firm’s equity. Using a reputable news source, locate a company that announced an earnings surprise. Was the reaction of the market consistent with your assessment of the impact discussed above? What occurred or is expected as a result of the earnings surprise?

Answer 1

Earning surprise can lead to fluctuations in the value of the equity to a large extent and if it is a positive learning surprise it will lead to increase in the value of the equity as more and more buyers will be increasing their exposure to the company because they feel like the company's turnaround have taken place and the company will making profit in the long run as it is leading to change in the sentiments and fundamentals of the company because it has performed beyond the Expectations in a positive manner.

As for the earnings surprises are concerned in recent times, Tesla has provided with positive learning surprise and reduction in the debt and increasing profits and reducing of the losses so the street was completely mesmerized with the performance of the tesla and it can be seen that the valuation of Tesla has a spurted almost ten times what it was one year before because this can lead to complete turnaround in the fate of the company if the company has gone debt free and the company is generating a liquid cash flows so it is about change in sentiments and change in fundamentals if the short term trajectory of company has changed in earning surprises.

When the negative surprise of earning is there there will be a negative reaction and selling of the stock whereas when the positive surprise of earning is there, there will be establishment of positions for longer period of time into those stocks as seen in terms of Tesla