We document that earnings acceleration, defined as the quarter-over-quarter change in earnings growth, has significant explanatory power for future excess returns. These excess returns are robust to a wide range of previously documented anomalies as well as a battery of risk controls. The magnitude of the excess returns (1.8% in a month-long window) is comparable to those from book-to-market, post-earnings announcement drift and gross profitability anomalies. The future return predictability appears to be consistent with investors assuming a seasonal random walk model for quarterly earnings and missing predictable implications of earnings acceleration for earnings growth two and three quarters hence. Finally, the excess returns from the basic earnings acceleration trading strategy can be enhanced further by nearly 45% by focusing on specific patterns of earnings acceleration.
Keywords: Earnings Acceleration, Trading Strategy, Active Investing, Mispricing, Anomaly
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