Abstract

http://ssrn.com/abstract=222552
 
 

References (28)



 
 

Citations (17)



 
 

Footnotes (11)



 


 



Are Benchmark Beaters Doing Anything Wrong?


Patricia M. Dechow


University of California, Berkeley - Haas School of Business

Scott A. Richardson


London Business School; AQR Capital Management, LLC

A. Irem Tuna


London Business School

April 10, 2000


Abstract:     
Prior research has documented the empirical regularity that more firms than expected (i) report small positive earnings and (ii) have zero forecast errors. It appears that management avoid reporting negative earnings or disappointing analysts. We investigate how and why firms beat these benchmarks (benchmark beaters).

We document that benchmark beaters have high accruals and unusual levels of special items relative to other firms. We find that a strong motivation for reporting small profits is to delay reporting bad news. We find that small profit firms show a decline in earnings and exhibit poor stock price performance over the following year. In contrast, we find that firms with zero forecast errors do well in the future. These firms have positive abnormal returns over the following year. We document that zero forecast error firms are high growth, high market capitalization firms. We argue that these firms want to avoid disappointing analysts since they are most likely to suffer from the "torpedo effect": small earnings disappointments lead to large stock price declines.

Number of Pages in PDF File: 48

Keywords: Earnings management, accruals, benchmark

JEL Classification: M41, M43, G29

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Date posted: April 24, 2000  

Suggested Citation

Dechow, Patricia M. and Richardson, Scott A. and Tuna, A. Irem, Are Benchmark Beaters Doing Anything Wrong? (April 10, 2000). Available at SSRN: http://ssrn.com/abstract=222552 or http://dx.doi.org/10.2139/ssrn.222552

Contact Information

Patricia M. Dechow (Contact Author)
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
Scott Anthony Richardson
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
AQR Capital Management, LLC ( email )
Greenwich, CT
United States
Ayse Irem Tuna
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
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