Does Rivals’ Meeting/Beating Analyst Expectation Matter? Evidence of Negative Information Transfers
Posted: 27 Jun 2010
Date Written: June 27, 2010
Prior studies recognize that information transfers associated with a firm’s earnings announcement occur due to shifts in industry’s competition balance. In this paper, we examine whether market assigns a lower reward (greater penalty) to a firm meeting (missing) earnings expectations (therefore MBE and non-MBE) when more rival firms meeting expectations. First, we find that after controlling for rival firms’ earnings information during the period, firms experience more unfavorable abnormal returns when more rival firms meet expectations. Second, we find that the penalty for missing expectation is greater when more rivals meet expectations. Therefore, market’s penalty (reward) for non-MBE (MBE), to some degree at least, depends on the percentage of rivals meeting expectations. Further analyses show that, for MBE firms, a discount on the premium to meeting expectations through expectations management increases when more rivals meet expectations; in contrast, we do not find similar conclusion from firms meeting expectations through earnings management. Therefore, a net premium to MBE is a function of the level of expectation a firm achieves, the proportion of rivals meeting earnings targets, as well as whether a firm meets expectation. Our results are stronger in more competitive industries, and are robust after controlling for investors’ sentiment.
Keywords: Rival Firms, Meeting Expectations, Information Transfers
JEL Classification: M40, M41
Suggested Citation: Suggested Citation