A situation that arises when earnings reported by a company are different from the earnings that had been expected by financial analysts. In equation form, it is the difference between reported earnings and expected earnings:
ESt = EPSt – E(EPSt)
Where: ESt denotes earnings surprise for quarter t; EPSt is reported earnings per share (EPS) for quarter t; E(EPSt) is expected EPS for the same quarter.
For example, a stock with reported quarterly earnings of $2 and expected earnings of $1.60 would have a positive earnings surprise amounting to $0.40. A positive earnings surprise often results in a sharp increase in the market price of a stock. On the contrary, a negative earnings surprise usually causes a sharp decrease in a stock’s market price.
This situation is also known as unexpected earnings.
