Do Pennies Matter? Investor Relations Consequences of Small Negative Earnings Surprises

56 Pages Posted: 4 Sep 2007

See all articles by Richard M. Frankel

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

William J. Mayew

Duke University - Fuqua School of Business

Yan Sun

Saint Louis University

Date Written: April 2007

Abstract

We study earnings - conference-call characteristics to understand the investor - relations consequences of small negative earnings surprises. Our study is motivated by the lack of empirical evidence supporting the notion that capital markets excessively punish firms that miss earnings targets by small amounts (Skinner and Sloan 2002, Kinney et al. 2002) despite managerial claims that such punishment exists (Graham et al. 2005). We view conference calls as a particularly powerful setting to investigate claims of asymmetric investor-relations effects for missing analyst expectations. We find a significant increase in call length for firms that miss analyst expectations by one cent compared to the increase in adjacent one-cent intervals. This increase is more pronounced for firms with higher analyst following. We also find that firms just missing expectations are about 5% less likely to offer future earnings guidance around the conference call. However, we find no statistically significant evidence that the tone of the call is asymmetrically more negative for firms that just miss expectations. We confirm these findings by examining whether the discussion between managers and individual analysts is related to whether the expectation of that particular analyst is met. In sum, while we find some statistical evidence to confirm the survey results of Graham et al. (2005) regarding the asymmetrically negative effects of missing expectations, our tests do not suggest that severe economic effects result from just missing expectations.

Keywords: Investor relations, earnings benchmarks, conference calls, analysts

JEL Classification: M41, M45, G12, G14, G29

Suggested Citation

Frankel, Richard M. and Mayew, William J. and Sun, Yan, Do Pennies Matter? Investor Relations Consequences of Small Negative Earnings Surprises (April 2007). Available at SSRN: https://ssrn.com/abstract=1010935 or http://dx.doi.org/10.2139/ssrn.1010935

Richard M. Frankel (Contact Author)

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

William J. Mayew

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7781 (Phone)
919-660-7971 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/mayew.htm

Yan Sun

Saint Louis University ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

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