Does Rivals’ Meeting/Beating Analyst Expectation Matter? Evidence of Negative Information Transfers

Posted: 27 Jun 2010

See all articles by Jiawen Liang

Jiawen Liang

National Chengchi University (NCCU) - Department of Accounting

Chen‐Lung Chin

National Chengchi University

Date Written: June 27, 2010

Abstract

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

Liang, Jiawen and Chin, Chen Lung, Does Rivals’ Meeting/Beating Analyst Expectation Matter? Evidence of Negative Information Transfers (June 27, 2010). American Accounting Association, AAA 2010 Financial Accounting & Reporting Section (FARS) Meeting. Available at SSRN: https://ssrn.com/abstract=1631252

Jiawen Liang

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan, Taipei
Taiwan

Chen Lung Chin (Contact Author)

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

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