The Market’s Assessment of the Probability of Meeting or Beating the Consensus

54 Pages Posted: 4 Jan 2011 Last revised: 27 Jun 2015

See all articles by Guang Ma

Guang Ma

McGill University - Desautels Faculty of Management

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: April 9, 2015

Abstract

We investigate to what extent the market uses information that is predictive of whether earnings will meet or beat the analyst consensus forecast of earnings (MBE henceforth): measures of a firm’s incentives to engage in MBE behavior, measures of constraints on MBE, measures of past MBE practices by firm and industry, and other variables. Using the Mishkin test framework and Bonferroni-adjusted p-values, we document that of a total of 21 variables, the market inefficiently uses information in one difficulty measure and four other predictors, suggesting that strong empirically and theoretically grounded relationships concerning MBE behavior are more likely to be unraveled by the market. We further show that a portfolio based on the difference between the objective MBE probability and the market-assessed MBE probability generates significant abnormal returns. This return predictability is distinct from known sources of predictability and cannot be fully explained by arbitrage risk or transaction costs.

Keywords: Earnings Management, Expectations Management, Return Predictability, Market Efficiency

JEL Classification: G14, M41, N2

Suggested Citation

Ma, Guang and Markov, Stanimir, The Market’s Assessment of the Probability of Meeting or Beating the Consensus (April 9, 2015). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1734484 or http://dx.doi.org/10.2139/ssrn.1734484

Guang Ma

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5
514-398-5075 (Phone)

HOME PAGE: http://guangma.info

Stanimir Markov (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972 883 5166 (Phone)

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