Seasonality of Earnings Momentum in an Emerging Market: The Taiwan Experiences

Abstract

In Taiwan, firms are requested to announce earnings for the first and fourth quarters within one and four months, respectively, after the fiscal quarters’ end. I therefore conjecture that prior to formal announcement, private earnings information have longer time to dissiminate for the fourth quarter than the first quarter, based on the gradual-diffusion-information model developed by Hong and Stein (1999). Furthermore, given the impact of earnings information on stock price, I hypothesize that returns after quarterly earnings announcement are higher for quarters having less time to disseminate private information before formal announcement than returns for quarters with more time. I uncover a pronounced seasonal pattern for post-announcement cumulative returns for hedge portfolios buying stocks having positive earnings surprises and selling stocks with negative earnings surprises, in accordance with the hypothesis. Specifically, cumulative returns for these hedge portfolios are significantly larger following the first quarter than the fourth quarter during the six to 12 months after the earnings announcement. The evidence is robust to risk adjustment. Moreover, this seasonality can be attributed more to the differential performance of stocks having positive earnings surprises than that of stocks having negative surprises. However, the seasonal results need to be explained with caution because the corresponding third quarter stock returns post-announcement are not as strong as those for the first quarters, despite the third quarter announcement also being made within one month after the fiscal quarter’s end.