In Search of Fundamentals

Posted: 22 Apr 2010 | Last revised: 16 Mar 2011

Zhi Da
University of Notre Dame – Mendoza College of Business

Joseph Engelberg
University of California, San Diego (UCSD) – Rady School of Management

Pengjie Gao
University of Notre Dame – Mendoza College of Business

Abstract

We use search volume for firms’ products to predict revenue surprises, earnings surprises and earnings announcement returns. We find that increases (decreases) in the search volume index (SVI) of a firm’s most popular product strongly predicts positive (negative) revenue surprises. This predictive power is weaker for standardized unexpected earnings (SUE). SVI has strong predictability for returns around earnings announcements, especially among firms with few products, growth firms and firms that manage their reported earnings. Taken together, the evidence suggests that search volume for a firm’s products is a value-relevent leading indicator about a firm’s future cashflow that the market does not fully incorporate into prices until the earnings announcement.

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