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

48 Pages Posted: 11 Sep 2008 Last revised: 12 Jan 2009

See all articles by Bruce K. Billings

Bruce K. Billings

Florida State University - Department of Accounting

Richard M. Morton

Florida State University - Department of Accounting

Tianming Zhang

Florida State University - Department of Accounting

Date Written: January 2009

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

Suggested Citation

Billings, Bruce K. and Morton, Richard M. and Zhang, Tianming (Tim), Managers' Incentives to Avoid Meeting or Beating Earnings Expectations: The Role of Open Market Repurchases (January 2009). Available at SSRN: https://ssrn.com/abstract=1266889 or http://dx.doi.org/10.2139/ssrn.1266889

Bruce K. Billings

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States
850-644-7889 (Phone)
850-644-8234 (Fax)

Richard M. Morton (Contact Author)

Florida State University - Department of Accounting ( email )

Room No. 421
Tallahassee, FL 32306-8234
United States
850-644-7877 (Phone)

Tianming (Tim) Zhang

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

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