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ABSTRACT Studying size and serial correlation effects, the authors examine why portfolios selected on the basis of standardized unexpected earnings (SUEs) exhibit excess returns. Results of the study indicate that the SUE effect and the size effect are independent anomalies; however, a more plausible explanation of the SUE effect may involve serial correlation of SUEs. The authors demonstrate that more than half of the post‐announcement responses to current quarter earnings may actually be pre‐announcement adjustments to next quarter's earnings.
Rendleman et al. (Sun,) studied this question.