Making Sense of Cents: An Examination of Firms that Marginally Miss or Beat Analyst Forecasts
Cornell University - Samuel Curtis Johnson Graduate School of Management
University of Iowa - Henry B. Tippie College of Business
College of William and Mary
John M. McInnis
University of Texas at Austin - Department of Accounting
July 22, 2009
Journal of Finance, No. 64, pp. 2359-2386, October 2009
This paper examines the performance consequences of cutting discretionary expenditures and managing accruals to exceed analyst forecasts. We show that firms that just beat analyst forecasts with low quality earnings exhibit a short-term stock price benefit relative to firms that miss forecasts with high quality earnings. This trend, however, reverses over a three-year horizon. Additionally, firms reducing discretionary expenditures to beat forecasts have significantly greater equity issuances and insider selling in the following year, consistent with managers understanding the myopic nature of their actions. Our results confirm survey evidence suggesting managers engage in myopic behavior to beat benchmarks.
JEL Classification: M41, M43, G29, G24
Date posted: July 22, 2009
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