The Market’s Reaction to Unexpected Earnings Thresholds
Oklahoma State University - Stillwater - School of Accounting
University of Toronto - Rotman School of Management
Jeff L. Payne
University of Kentucky - Von Allmen School of Accountancy
Wayne B. Thomas
University of Oklahoma - Michael F. Price College of Business
July 28, 2010
We examine differences in quarterly earnings announcement returns as a function of meeting or missing each of three earnings thresholds – reporting a profit, reporting an increase in earnings, and meeting analysts’ forecasts. In contrast to prior research, the research design identifies the incremental market reaction to the profit and earnings increase thresholds, after controlling for the effect of meeting or missing analysts’ forecasts. Using this methodology, we find little evidence of incremental threshold effects beyond meeting analyst forecasts. In other words, zero earnings and a zero change in earnings do not appear to be “special” points that elicit a differential response by investors. Our results are robust to including a number of control variables and alternative tests. The fact that we find little evidence to support market-related incentives to manage earnings at the profit and earnings increase thresholds suggests either that managers have other incentives to manage earnings at these thresholds or that managers perceive market rewards and penalties when none exist.
Number of Pages in PDF File: 42
Keywords: Analyst forecasts, earnings thresholds, market reaction
JEL Classification: M41, G30working papers series
Date posted: April 24, 2010 ; Last revised: July 29, 2010
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