The Earnings Numbers Game: Rewards to Walk Down and Penalties to Walk Up of Analysts’ Forecasts of Earnings*

40 Pages Posted: 2 Aug 2009 Last revised: 27 May 2011

See all articles by Siew Hong Teoh

Siew Hong Teoh

University of California, Irvine - Accounting Area

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Yinglei Zhang

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Date Written: July 30, 2009

Abstract

We provide a comprehensive study of the valuation consequences to meeting/beating analysts’ forecasts (MBE) versus missing expectations conditioned on the forecast revision path prior to the earnings announcement. We find that investors reward firms that walk down forecasts to achieve a positive earnings surprise and penalize firms that walk up forecasts to achieve a negative earnings surprise. The reward and penalty are not justified by subsequent cash flow performance and the post-event return reversal suggests that investors were partially misled by strategic motives belying the forecast revisions. There is higher insider net selling and more new issues for walk down firms, and higher insider net buying and more repurchases for walk up firms. The capital market incentives for selling and MBE reward disappear in recent periods, suggesting that investors learn to discount a walk down. However, the walk up penalty and capital market incentives to depress prices for buying by insiders and the firm remain even in recent years.

Keywords: Analysts’ Forecasts, Earnings Guidance, Walk down, Walk up, Market Efficiency

JEL Classification: G14, M41

Suggested Citation

Teoh, Siew Hong and Yang, Yong George and Zhang, Yinglei, The Earnings Numbers Game: Rewards to Walk Down and Penalties to Walk Up of Analysts’ Forecasts of Earnings* (July 30, 2009). Available at SSRN: https://ssrn.com/abstract=1442564 or http://dx.doi.org/10.2139/ssrn.1442564

Siew Hong Teoh (Contact Author)

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin, N.T.
Hong Kong

Yinglei Zhang

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

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