Fearless Idea 16: Crack the Earnings Puzzle

SMITH BRAIN TRUST — Wall Street responds to surprises, but not always in intuitive ways. Share prices go up at the firm level when a company issues a stronger than expected earnings report, which makes sense. But the opposite often happens at the aggregate level when companies collectively exceed expectations. Share prices can drop instead of rise.

“That’s the puzzle,” says Rebecca Hann, an accounting professor at the University of Maryland’s Robert H. Smith School of Business.  In a recent paper published in the Journal of Accounting and Economics, Hann and two Smith School PhD co-authors trace the counterintuitive market reaction to the influence of monetary policy from the Federal Reserve.

Savvy investors understand that the Fed likes to raise interest rates during growth periods, which tends to drive stock prices downward. So investors brace themselves for the impact following a robust earnings season — like waiting for the other proverbial shoe to drop.

“When earnings news are good, investors anticipate that the Fed is going to take action,” Hann says. “It’s about expectation.”

Wall Street analysts have long debated the link between aggregate earnings surprises and monetary policy, but Hann and her co-authors quantify the association using Federal funds futures data. She says the information is useful because it can help analysts forecast the Fed’s monetary policy.

“Everyone watches the Fed’s next move,” Hann says. “The minute Janet Yellen speaks, you can see the stock market move with her message.”

Read more: Gallo, L., Hann, R., C. Li, 2016. Aggregate Earnings Surprises, Monetary Policy, and Stock Returns. Journal of Accounting and Economics, Vol. 62, No. 1, 103-210.

Rebecca Hann is associate professor and KPMG Faculty Fellow at the University of Maryland’s Robert H. Smith School of Business.

Research interests: The role of accounting information in the capital market. Financial statement information is central to an efficient capital market, but accounting numbers are more art than science because the rules that govern how financial statements should be prepared are inherently flexible. “My research examines whether managers make discretionary reporting choices to inform or mislead investors and how these choices affect the quality of financial reporting, and ultimately, the allocation of capital,” Hann says. More recently, she has expanded her focus to the role of accounting information in the macroeconomy.

Selected accomplishments: Research published in The Accounting Review, Journal of Accounting and Economics, Journal of Accounting Research, Journal of Finance and Review of Accounting Studies; served on 12 PhD dissertation committees and chaired five of them; 2015 Best Dissertation Supervision Award from the American Accounting Association; 2014 Most Effective Core Professor Award, chosen by full-time Smith MBA students; 2014 Krowe Teaching Excellence Award at Smith; 2013 Best Discussant Award at the Review of Accounting Studies Conference.

About this series: The Smith School faculty is celebrating Women’s History Month 2017 in partnership with ADVANCE, an initiative to transform the University of Maryland by investing in a culture of inclusive excellence. Daily faculty spotlights support activities from the school’s Office of Diversity Initiatives, culminating with the sixth annual Women Leading Women forum on March 30, 2017.

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