The Market Reward for Achieving Analyst Earnings Expectations: Does Managing Expectations or Earnings Matter?

Journal of Business Finance and Accounting, 2011 Vol. 38 (1/2), 58-94.

51 Pages Posted: 16 Oct 2007 Last revised: 21 Nov 2013

See all articles by Vasiliki E. Athanasakou

Vasiliki E. Athanasakou

Saint Mary's University, Canada - Sobey School of Business

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2010

Abstract

This study explores the market response to achieving analyst earnings expectations, distinguishing between expectations achieved through earnings forecast guidance and earnings management. We consider three earnings management tools: real earnings management, working capital accruals management, and classification shifting. Analysis indicates that UK firms use earnings forecast guidance and classification shifting to achieve analyst expectations. The market does not reward firms that achieve expectations through forecast guidance, and achievers that classification shift receive a lower market reward than genuine achievers. The market response aligns with information on future profitability and rational pricing tests show that there is no overall mispricing of achievers. Evidence of stock price incentives to engage in earnings forecast guidance is found only within more opportunistic downward forecast revisions mainly driven by high market growth expectations.

Keywords: analyst expectations, market reward, earnings management, classification shifting, earnings forecast guidance, opportunistic, informative

JEL Classification: M41, M43, M47, G12, G29

Suggested Citation

Athanasakou, Vasiliki E. and Strong, Norman Charles and Walker, Martin, The Market Reward for Achieving Analyst Earnings Expectations: Does Managing Expectations or Earnings Matter? (October 1, 2010). Journal of Business Finance and Accounting, 2011 Vol. 38 (1/2), 58-94.. Available at SSRN: https://ssrn.com/abstract=1021949

Vasiliki E. Athanasakou (Contact Author)

Saint Mary's University, Canada - Sobey School of Business ( email )

Sobey Building 311
923 Robie Street
Halifax, Nova Scotia B3H 3C3
Canada

Norman Charles Strong

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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