Making Sense of Cents: An Examination of Firms that Marginally Miss or Beat Analysts Forecasts

Abstract:     
This paper examines the role of earnings quality in the future performance of firms that marginally miss or beat analysts' forecasts. We focus primarily on two groups of firms: those that miss their forecast but appear not to have attempted to exceed it by managing earnings, and those that exceed their forecast but appear to have done so through accruals or reducing discretionary expenditures. We find that while the miss/beat effect is initially stronger, earnings quality manifests itself over a longer horizon. During the first year, markets seem to react more strongly to the miss-beat effect, with firms that beat analyst forecasts despite a low quality of earnings outperforming firms that miss their forecasts despite reporting high quality earnings. During the second and third years, however, the performance of firms that missed their forecasts while maintaining high quality earnings exceeds the firms that beat their forecasts with low quality earnings. This holds for both future returns and future earnings changes. Our results suggest that while beating expectations has short-term benefits, there are negative long-term consequences associated with managing earnings in order to do so.

Number of Pages in PDF File: 35

Keywords: miss, beat, earnings management, analysts forecast

JEL Classification: M41, M43, G14, G29

working papers series