Managers' Incentives to Avoid Meeting or Beating Earnings Expectations: The Role of Open Market Repurchases

Abstract

Prior research on meeting or beating earnings expectations focuses on managers' incentives to keep stock prices inflated by avoiding negative earnings surprises. However, in certain situations, managers may be motivated to depress stock prices in order to maximize their utility. We hypothesize and find evidence suggesting that managers opportunistically avoid reporting earnings that meet or beat analyst expectations to depress stock prices and hence lower the cost of share repurchases. Complementary to this, we find that the decline in meeting or beating among firms repurchasing shares is temporary. Building on results in Gong et al. (2008), we also provide evidence that stock prices decline more substantially and consistently when firms fail to meet or beat relative to merely reporting negative performance-adjusted abnormal accruals, suggesting failing to meet or beat may reflect a more comprehensive and effective strategy to depress prices. Further, we find a substantial incremental downward price effect for failing to meet or beat after controlling for the sign of abnormal accruals. This study complements prior research that focuses on incentives to meet or beat expectations by presenting the "other side of the story" and therefore provides a more complete picture of managers' opportunistic behavior related to analysts' earnings expectations.

Keywords: meet or beat expectations, open market repurchase

JEL Classification: M41, M43, G29, G14, G30, G35