Are Earnings Surprises Costly?

41 Pages Posted: 27 Sep 1999

Date Written: August 1999


We investigate potential costs experienced by firms that repeatedly have large quarterly earnings surprises during a condensed period of time. Consistent with our predictions, our univariate results indicate that surprise firms have lower analyst following, lower institutional ownership, and higher earnings-price ratios than firms that do not have large earnings surprises. Our multivariate findings, controlling for potentially confounding factors, are generally consistent with the univariate results, although our conclusions regarding institutional ownership are weaker. Further, our results generally hold regardless of whether the firm has positive surprises, negative surprises, or earnings surprises of mixed sign, suggesting that negative earnings surprises do not drive the results. Assuming that the documented differences represent a cost of earnings surprises, our findings provide an explanation for managers' desire to avoid surprising the market and their willingness to voluntarily disclose earnings-related information in advance of the mandated earnings announcement.

JEL Classification: M41, M43, G29

Suggested Citation

Walther, Beverly R. and Willis, Richard H., Are Earnings Surprises Costly? (August 1999). Available at SSRN: or

Beverly R. Walther

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1595 (Phone)
847-467-1202 (Fax)

Richard H. Willis (Contact Author)

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States
615-343-1050 (Phone)
615-343-7177 (Fax)

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